- Two Fed hawks fly as Japanese official sounds warning
- Former BoJ official voices disagreement with current policy
- New signals give added import to today's FOMC minutes
By John J Hardy
Japan’s officialdom was making noise overnight after USDJPY briefly slipped below 100.00 yesterday before the US Fed’s William Dudley and Atlanta Fed’s Dennis Lockhart bailed out the USD with his more hawkish comments, while Japan’s top currency official tried to warn the market off with comments pointing to intervention potential if “excessive” strengthening continues.
More interesting were policy comments made by a former Bank of Japan official discussing the failure of the bank's current policy mix, the need to stop bond purchases, and proposing instead that the Japanese government raises wages for civil servants and increases the minimum wage, among other measures.
The Fed’s Dudley (influential as the head of the NY Fed) indicated yesterday that a September rate move is a live possibility and the Atlanta Fed’s Lockhart (FOMC non-voter this year) indicated two rate hikes were still possible this year. The market very modestly upgraded its rate expectations, while the USD was more responsive, particularly in USDJPY (an ugly day on bond markets may be a contributing factor there.). Today’s Federal Open Market Committee minutes have taken on added importance as an event risk after the gyrations of the last couple of sessions.
Glenn Stevens was out yesterday in an interview with The Australian
and WSJ making a pointed reference
to an unwelcome type of foreign capital inflow – for the purchase of existing assets (and here we should mostly think “housing”) as opposed to foreign capital inflows for funding important sectors like mining that help to grow the Australian economy. This could have important policy implications going forward as a way to stem exchange rate appreciation with selective controls rather than via dovish monetary policy – stay tuned for more.
USDJPY rebounded strongly yesterday from the dip below the 100.00, as that level remains the key structural support for the pair. Also helpful for the bulls was the retaking of the local 100.70 area, the local low that was recently broken. If the US FOMC minutes are moderately supportive tonight and bond yields continue to pull higher, the bulls may make a run for it – with the next key objective the Ichimoku cloud levels.
The G-10 rundown
USD – Important bounce yesterday to prevent a new down-trend, though that does not yet mean we have a new uptrend – looking for confirmation of this today an through end of this trading week – especially in USDJPY. Note that the dovish Bullard (who has spoken in favour of one more hike and then no more through end 2018) is out speaking an hour before the FOMC minutes release.
EUR – EURUSD continues to trade clear of the 1.1200/50 zone after yesterday’s break higher – looking for confirmation follow-up higher or a rejection back lower post FOMC minutes today.
JPY – USDJPY dips may be worth picking up here if bond markets correct (yields pulling higher) and the FOMC minutes are supportive of the USD – a smart little reversal, after all, in USDJPY yesterday after the brief visit below 100.00.
GBP – GBPUSD slipping back above 1.3000 ahead of important UK data, which as we discussed previously, is more of a sentiment test in a heavily short market rather than an important indicator for how Brexit is affecting the UK, as the most important data releases are from the June data cycle. If GBP going to squeeze higher here, the preferred instrument would be EURGBP downside.
CHF – interested to see if we ever get a sell-off in risk assets and if so, how this affects CHF, which remains frozen in the 1.0800-1.0950 range in EURCHF.
AUD – Governor Stevens’ speech doesn’t have an immediate negative effect on AUD, but suggests that the focus from here for managing currency risks could be pinpoint measures to discourage the kind of capital inflows that Australia will find “unwelcome”, as opposed to aggressive rate cuts.
CAD – CAD languishing a bit – but USDCAD needs to regain 1.3000 in short order for bullish interest to pick up here. Oil prices a key factor after the very steep rally of the last four days.
NZD – a supportive milk auction yesterday and better than expected employment data overnight has NZD back on the bid versus the AUD, though still in the range and we still look for an eventual resolution higher. NZDUSD pushed back once again from the 0.7300, keeping the bears’ hopes alive, if still somewhat in limbo.
SEK – watching whether the 9.50 area contains the upside in EURSEK, keeping some of the momentum of the selloff from the 9.60 area intact and thus keeping the focus on whether we bust back into the lower range 9.40/35.
NOK – will likely require more support from the oil market to punch down through the key 9.12/15 area in EURNOK.
Economic Data Highlights (all times GMT)
- 0830 – UK Jul. Jobless Claims
- 0830 – UK Jun. ILO Unemployment Rate / Jun. Average Weekly Earnings / Jun. Employment Change
- 1700 – US Fed’s Bullard to Speak
- 1800 – US FOMC Minutes
- 2350 – Japan Jul. Trade Balance
– Edited by Clare MacCarthy
John J Hardy is head of forex strategy at Saxo Bank