Yields on core European bonds went for a slide yesterday as prices rose in response to the ECB's decision to leave its QE programme unchanged – for now at least. Elsewhere, the USD continues to make gains on its peers.
Article / 28 July 2016 at 8:30 GMT

FX Update: USD fizzles post-FOMC, BoJ a big unknown

Head of FX Strategy / Saxo Bank
  • Diffident FOMC outcome leaves dollar in the lurch
  • Uncertainty reigns concerning BoJ stimulus
  • Last major downside USDJPY support around 102.00

In the dark: markets don't know quite what to expect out of Tokyo tonight. Photo: iStock

By John J Hardy

The market decided that the Federal Open Market Committee’s modest hawkish upgrade to its language was too minor to merit further support for the USD rally. Dollar bulls called it a day and nervous USD longs flushed their positions as the break below 1.1000 in EURUSD failed to hold and rate hike expectations actually retreated a basis point or two for early 2017. 

Wringing hike expectations out of the Fed is like squeezing water from a stone. This doesn’t represent a major development for the greenback, but simply the risk that the dollar limps around for the remainder of the summer unless the Bank of Japan can bring something new to the table tonight. 

Moving on then to tonight’s BoJ meeting, which arrives amid intense speculation on not only whether the central bank will announce anything, but on whether what it announces means anything. 

Adding to the uncertainty is the lack of clarity on the composition of the huge fiscal stimulus announced by prime minister Shinzo Abe and how much actual new spending that package contains. 

We’re unsure what the BoJ will do, but the best option might be to steer away from tinkering with existing QQE measures and instead indicating a change of approach is on the way geared toward accommodating fiscal stimulus, with details to be ironed out in the future. 

This keeps a spike in the JPY at bay at least until the next meeting and leaves the ball in Abe’s court. A conspiracy theorist might say that the BoJ and Abe have already agreed on fiscal/BoJ coordination, but want to make it appear that the two are acting independently. Bloomberg doesn’t say this in yesterday’s article, but does hint that the timing and odd nature of the stimulus announcement are a heads-up to the BoJ. 


USDJPY looks likely to leap rather strongly in either direction in the wake of the BoJ meeting. Interesting for the bulls to have the Ichimoku cloud level pressing lower here and providing a bullish signal if the BoJ manages to clear the bar on the dovish side and we see a strong rally in ensuing sessions that clears the cloud. 

Even if we head lower, the recent rally has weakened the downtrend, and there are further layers of support ahead of the 100.00 level, starting with the 103.50 area, but the last major zone is 102.50/00.


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Source: Saxo Bank 

The G-10 rundown

USD – an ugly reversal puts the USD back on the defensive, though yesterday could merely be a sign that we will extend the summer doldrums well into August. A lot of coverage recently on the meaning of the spike in USD Libor – it’s a notable development, but doesn’t seem to be offering much support for the greenback.

EUR – we have the EBA stress test results on the way tomorrow morning BUT THERE doesn’t seem to be a great deal of anticipation around these. The EURUSD reversal points to 1.1175/1.1200 as the key range highs for now.

JPY – there is so much uncertainty in JPY, as can be seen from large gyrations overnight. Suspect the upside potential for yen more constrained than the downside potential, but how does BoJ surprise?

GBP – EURGBP pushing toward the local highs around 0.8425 this morning on a stronger euro and as yesterday’s stronger than expected UK GDP not seen as relevant for the path for the UK from here.

CHF – not sure what is driving EURCHF higher, but interesting that the rally is coming just ahead of tomorrow morning’s stress tests EBA stress tests. Very disappointing day yesterday for USDCHF bulls as latest attempt at new highs emphatically erased.

AUD – AUDUSD jumped higher, more on USD weakness than AUD strength, and AUDUSD has churned wildly as we zoom out and wait for either 0.7650 or perhaps 0.7350/00 to come into view before drawing conclusions.

CAD – USDCAD bulls have been corralled here and are in full retreat on the rejection of the bullish breakout above 1.3200. Only a strong pull back higher into the close can raise tactical hopes for CAD bears.

NZD – The entry zone for fresh AUDNZD longs has come into view overnight below 1.0600, while NZDUSD bears have shifted their lines of defense back to the last Fibo’s toward 0.7185 (61.8% and a bit higher).

SEK – Weak Retail Sales numbers this morning from Sweden not doing SEK any favours, though this was offset by better than expected unemployment data (although that data series is woefully spiky). EURSEK is running out of range to the upside if the action stays above 9.50.

NOK – not sure what is holding EURNOK down with the steep slide in oil prices but eyeing the last shreds of the range here around 9.45.

Upcoming Economic Calendar Highlights (all times GMT)

  • Germany Jul. Unemployment Change / Unemployment Rate (0755)  
  • Euro Zone Jul. Economic / Services / Consumer / Industrial Confidence (0900)  
  • Germany Jul. CPI (1200)  
  • US Jun. Trade Balance (1230)  
  • US Weekly Initial Jobless Claims (1230)  
  • Eurozone ECB’s Coeure to Speak (1800)

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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