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John Hardy, Head of FX Strategy at Saxo Bank, takes a look at today’s steep drop in the Australian Dollar and the day’s other key events and indicators. More of John’s research can be seen at Saxo Bank’s TradingFloor.com.
The Aussie was ripped for steep losses overnight on a weak CPI print that gapped far below expectations and was at the weakest (for the Trimmed mean measure) since the 2002 start of the data series. Interest rate expectations gapped lower and the RBA will have to respond in some way at next week’s meeting.
Whether the reaction in the exchange rate sticks is a difficult question, given the backdrop of this market, where intense commodity speculation has taken over at the moment and commodity currency peers have done very well, most notably CAD.
If the Fed engineers a USD rally tonight and the AUDUSD move lower sticks and continues toward 0.7500, we have a sufficiently large reversal to look for a new downtrend in coming weeks.
A quick reversal of today’s reaction and rally back above 0.7700/50, on the other hand, suggests the risk that the rally cycle is not over and that we may need a final resolution above 0.8000 somewhere before finding more sustainable resistance to the move. The Reserve Bank of Australia is up next Tuesday as we watch for how much this latest inflation data has shaken Governor Stevens’ complacent and preferred anti-dovish stance as he clearly opposes ultra-low rates as a matter of principle.
The Fed will not hike rates today and is unlikely to tip its hat strongly for a June move, at it is still too soon after the dovish March meeting. However, market conditions have improved so drastically that it seems the Fed should somehow acknowledge this with a twist or two of new language in the statement tonight.
Still – out the expectations curve, we’re hardly likely to see a notably shift in Fed rate projections. The USD reaction may play more on the themes from other asset markets and the BoJ’s move or non-move just hours later. A totally recycled Fed statement and entire lack of mention of market conditions would like embolden USD sellers.
Fairly straightforward here: the Reserve Bank of New Zealand is dovish and will cut rates again, but it may be too early tonight. The NZD risks strength if the FOMC fails to engineer a USD rally and we get a dovish BoJ – after all, the commodity market is receiving considerable attention at the moment and a BoJ that is warming up for NGDP intensifies interest in the commodity/hard asset theme. The ascending channel is still intact in NZSDUSD and we’ll need a knockout punch to the downside by this time tomorrow or we risk the NZD dragging itself back higher.
A former deputy Japanese economic minister said the yen is too strong and argued in favour of a ¥10 trillion (around $90 billion) stimulus package, further underlining the idea that Japan’s next big policy move will be a one-two Kuroda/Abe punch of fiscal stimulus with central bank support. However, tonight’s meeting may be too early, though it’s still possible Japan is ready to move now rather than later. Let’s discuss three scenarios – all of which will be interacting with whatever impulse the USD receives on the back of the FOMC meeting:
No policy change and a recycled statement with “ready and willing to act if necessary” boilerplate: watch for a kneejerk JPY rally that lacks punch beyond the first impulse because the market is already very long of JPY and we/the market believe something is coming eventually.
Marginal stimulus/more of the same: If we merely see another expansion of the equity and/or corporate bond purchase programmes, the market might more or less shrug its shoulders and stay rangebound as this can’t do the heavy lifting in JPY crosses and the market will still have the idea that a marginal move is a rearguard action to buy time ahead of a “the big one” we discuss below arriving at the June or July meeting.
The big one: This would be something new (and necessarily big) that contains combined fiscal policy/monetary policy measures and could see a significant weakening in the yen, particularly given the current speculative positioning. Such a move might also be seen as finally truly inflationary and drive commodity prices and bond yields higher in the anticipation that the NIRP/ZIRP and “regular QE” era is drawing to a close.
Pivot time here for AUD through next Tuesday’s RBA meeting, as the market has upgraded the risk of rate cuts after the weak CPI overnight. If today’s move holds and extends to 0.7500, it looks like a strong statement that ends the former uptrend and see an eventual resolution lower. Bulls will need an immediate reversal back higher tonight/tomorrow with follow through post-RBA next Tuesday to argue for another leg of upside that challenges above 0.8000.
The G-10 rundown
USD – See comments above – generally we are looking for new language to recognize the market conditions improvement, but is this enough to offer the greenback notable support? It may be too soon if the focus remains on commodity prices and the macro themes coming out of the BoJ meeting. If the USD recovery doesn’t happen now – it may face a very significant delay of another couple of months.
EUR – The market has lost interest in trading the euro at the moment, as implied volatility in EURUSD has dropped to the low end of the range even for three month options (which more than captures the Brexit vote – that looks relatively cheap.) Long EURUSD strangles a strategy for those assuming that we either try toward 1.20 or well below 1.10 in the next few months.
JPY – tremendous uncertainty into the BoJ meeting announcement overnight. Something new and big is coming – but is this meeting too soon for anything more than a few more asset purchases as a holding strategy until a new helicopter-money/NGDP style announcement is made in either June or July? Certainly the potential for a reaction very large as discussed above.
GBP – Pushing hard to the upside – EURGBP is grinding down in the key 0.7700/50 zone. GBPUSD eyeing the range extremes above 1.4670 and may punch through if USD can’t engineer a rally ahead of tomorrow.
CHF – 0.9700/0.9675 a key tactical support area, with a break suggesting a test of the range/cycle lows. The rise in yields and recent commodity focus are a CHF negative – watching for upside trend potential in EURCHF if 1.1025 taken out.
AUD – devastated on the CPI release overnight and was susceptible to such a reaction anyway as the market has gotten very long of AUD and this challenges the RBA’s neutral stance on rates. But, if the USD can’t rally tonight and BoJ manages to keep JPY weak, the recent commodity focus could see AUD avoiding a full bearish reversal.*
CAD – continues to grind stronger on recent themes, positive BoC language yesterday (Poloz likes the fiscal expansiveness of the Trudeau government). Potential still to the upside? 1.25 a key round figure not much lower in USDCAD.
NZD – Firm against the struggling AUD overnight – the ugly ascending channel in NZDUSD is still intact and we’ll need a dovish RBNZ and knock-out below of the channel bottom.
SEK – Swedish yields rising are SEK supportive, but focus on higher rates generally perhaps a drag on the krona. Watching the 9.12-9.22 levels in EURSEK for the next impression.
NOK – Remains within lower range and the 9.15 support/pivot is the key in EURNOK for whether commodity focus continues to drive NOK strength. NOKSEK also getting interesting if the parity level can be taken out again.
Upcoming Economic Calendar Highlights:
- UK Q1 GDP Estimate (0830)
- US Mar. Advance Goods Trade Balance (1230)
- US Mar. Pending Home Sales (1400)
- US FOMC Rate Decision (1800)
- New Zealand RBNZ Rate (2100)
- Japan Mar. Overall Household Spending (2330)
- Japan Mar. CPI (2330)
- Japan Mar. Retail Trade (2330)
- Japan Mar. Industrial Production (2350)
- Japan Bank of Japan policy announcement (no time given)