Article / 29 July 2016 at 14:30 GMT

FX 4 Next Week: BoJ still in play, but more central banks to come

Head of FX Strategy / Saxo Bank
  • Tuesday's RBA meeting appears set to enliven the AUDUSD trade
  • Sterling set for another post-Brexit plunge as UK data come in soft
  • NZDCAD downside in focus as oil slide over-extends
  • USDJPY reeling after BoJ surprise, but the story is far from over

Canberra, Australia
Picking up signals: AUDUSD is in limbo for the moment, but next week's central bank outing should provide the Aussie with some direction. Photo: iStock

By John J Hardy

Currency moves have mostly been rather muted this week outside of the knee-jerk reaction to the Bank of Japan meeting disappointment. Also, the USD was weaker after the Federal Open Market Committee failed to move the needle on the trajectory of rate hikes. 

Next we have a full menu of US economic data risks that should carry more weight than last week’s FOMC meeting if they hold any surprises. As well, we focus on Tuesday's Reserve Bank of Australia and Thursday's Bank of England meetings as the key event risks for the week.

AUD direction post-RBA meeting

Australia’s Reserve Bank meets this week after the market has priced in a bit more easing since the most recent meeting, with a strong majority looking for a 25 basis point cut to the cash rate. Last week, we wrote on the prospects for AUDNZD upside on the prospects for the RBNZ to eventually ease far more than the RBA. This week, AUDNZD settled lower in the range as this theme has generally failed to fire. But we still prefer to see the recent lows as a technical bottom, though traders might look for evidence post-RBA that this is the case. 

Elsewhere, AUDUSD is in limbo and we need a technical resolution either way, but we will require the RBA to provide a signal for AUD as well as for interest to pick up in the USD direction amidst the heavy US economic calendar next week. AUDUSD technicals are very indeterminate at the moment.

Trading stance: AUDNZD bulls will need the pair to bounce strongly this week to suggest the consolidation is over and that a focus higher is justified. Traders can then look to establish long positions with stops below the lows of that possible post-RBA bounce. AUDUSD traders will want AUDUSD to move (post-meeting) either above 0.7600 to argue for a test higher, or below 0.7400/25 for a test of the pivotal 0.7300 area. US data are likely to play a key role there as well, especially the ISM non-manufacturing survey on Wednesday and the Friday jobs report.

GBP downside

Sterling has been digesting the post-Brexit vote for the last three weeks with mounting evidence of a hit to the UK economy that the BoE will likely seek to address with a 25 basis point rate cut next week. 

We look for sterling to test lower now that it has had some time to absorb the Brexit vote.

Trading stance: Traders will keep the focus lower in GBPUSD as long as the 1.3200/50 area remains in place as resistance and especially on a break below 1.3050. Those looking to avoid USD volatility around US figures might consider EURGBP, which may continue to focus higher if risk appetite is weak as well and if the 0.8425 break remains intact early next week.

NZDCAD downside

The NZDCAD rally from June and into early July broke spectacularly recently after the Reserve Bank of New Zealand launched a clear effort to talk down its policy rate and because the bank has considerable easing room to work with compared to lower-yielding currencies like CAD. 

Over the last couple of weeks we’ve seen a throwback rally in NZDCAD due to weaker oil prices, but this move may run out of steam next week as the oil selloff looks very extended and as the pace of Chinese yuan appreciation that may have boosted Asian currencies this week is not seen likely to continue at the same pace next week.

Trading stance: Traders will look for NZDCAD to top out and reverse ahead of the 0.9550 area top, and then test back lower toward 0.9000 in the coming weeks.

USDJPY range trading

In last week’s trading themes, we wrote of the potential for JPY strength on the anticipation for disappointment at this week’s BoJ meeting. That is indeed what we got, though the move was relatively modest as the bank indicated it will make a major policy assessment ahead of the September meeting – suggesting the risk of new measures then. 

In the interim, we will have a stimulus announcement from the Abe government. In that light, the JPY could head a bit stronger, but could remain bottled up in a relatively wide range ahead of the September 21 meeting.

Trading stance: USDJPY traders may look to buy tactical USDJPY calls in the 102.50 area or lower – expiries from two weeks to one month and slightly out of the money. If the range holds in coming days, traders can then look to hedge in and out on rallies from whatever range lows form in fractions of the underlying value (for example, on signs that Abe will impress with the size of the stimulus package to come in terms of new spending, or if US data prove stronger than expected).

The immediate post-BoJ yen trade was something of a mad dash, but expect USDJPY to remain crowded if somewhat more orderly than in the immediate wake of the statement. Photo: iStock

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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