FX Update: USD slide set to pause for a while?

Bank of Japan board member Yukitoshi Funo called for structural reforms to address weak demand and productivity growth in Japan, while still calling for a full commitment to Japan’s current monetary policy programme. This knocked the JPY overnight, despite lower US yields yesterday after the release of the PCE inflation data.

Reuters reports that US president Donald Trump may be close to calling for an investigation of Chinese trade practices, a move that could raise the risk of geopolitical tensions, especially given the situation in North Korea and accusations from the Trump administration that China hasn’t done enough to pressure the North Korean regime.

New Zealand data overnight was disappointing across the board, as second-quarter employment was weaker than expected, with a negative print for the quarter-on-quarter employment change, and average hourly earnings disappointing (at +0.8% q/q, but +0.9% was expected and the previous quarter's figure was a weak +0.4%). House prices rose only 6.2% year-on-year, down from as high as +15% over the last couple of years. 

This contrasts with the situation in Australia and Canada, where house prices rises have been higher and have picked up recently. All in all, suggests the Reserve Bank of New Zealand should feel content to sit on its hands for a long time yet, particularly given the steep back-up in the New Zealand trade-weighted exchange rate, which is poised near multi-year highs. Kiwi shorts in the crosses may develop as a theme – for example, in AUDNZD and NZDCAD, if note NZDUSD (we still focus on whether the 0.7450 break holds over the next couple of weeks there).

Getting a bit exotic in the crosses here, but NZDCAD is an interesting one from a fundamental perspective if we look at the relative shift in the interest-rate outlook in recent weeks. Canadian data and activity have picked up, and the Bank of Canada has waxed hawkish, while the RBNZ rate outlook has gone nowhere and is unlikely to for quite some time, particularly after the wak overnight data from New Zealand. This could make for kiwi weakness in the crosses in the months – with an interesting line in the sand in NZDCAD around the 0.9200-50 zone.

USD – the greenback caught a bit of a break overnight, but nothing impressive yet. The focus now may be political as much as economic. One wonders if Trump may have reached some kind of temporary rock bottom with the recent Scaramucci circus, but that's not clear, and the budget ceiling uncertainty still hangs over the greenback for the next couple of months.

EUR – there are no signs that the euro rally is flagging as EURUSD may have its sights set on 1.2000, though the USD index is nearing a massive multi-year low that may provide some support on the first encounter. Positioning is getting stretched, so we may be near/at at least a temporary high soon.

JPY – the dip in US yields yesterday provides no fundamental support for the USDJPY move overnight, but the market may be unwilling to take out 110.00 level unless we get a bigger dip in yields or some broad risk-aversion move.

GBP – it's all about two-way risks going into tomorrow’s Bank of England meeting. Any rate rise may be a one-off affair for later this year, and there is also the risk that the BoE recognises that the main factor feeding inflation was the massive slide in sterling after the Brexit vote. Nevertheless, a statement pointing to an imminent rate hike could boost GBPUSD further into 1.3500. A dovish performance from the BoE, on the other hand, would likely see round punishment of sterling across the board.

CHF – the remarkable repricing in the Swiss franc has turned heads, and now that traders realise that EURCHF can move, there may be further room for this to continue, possibly even to 1.2000 eventually, as traders feel they must be involved or risk missing out.

AUD – a bit of weakness overnight at 0.8000 in AUDUSD is proving a tough nut to crack, but the trend is higher as long as the pair maintains roughly 0.7750-0.7800. There's some risk of a tactical setback for the Aussie later this week if the Reserve Bank of Australia statement ratchets up concern about the exchange rate. But if mining stocks and commodity prices continue to climb, AUD will have a hard time staying down for long.

CAD – There's been some much-needed consolidation after the brutal run lower in USDCAD, with 1.2500 a rough sticking point for the moment. The exchange rate appreciation is a kind of rate hike for Canada, and the Bank of Canada is going to tilt to the cautious side after this move, so any further CAD gains may be slower in coming from here.

NZD – the kiwi weakened on weak data as this cools any rate-hike anticipation for some time. AUDNZD will be interesting again above 1.0800, while NZDUSD struggling below the old 0.7450 high today is a bit tantalising for traders scratching around for places to get long USD.

SEK – Swedish short rates are trying valiantly to get interesting as they poke toward the highs of the last 18 months, but it's remarkable that the humming Swedish economy hasn’t inspired more SEK strength. We like fading EURSEK strength as long as it remains below 9.65.

NOK – oil gave NOK a recent boost, but the policy outlook is not playing ball for the currency, which may keep it rangebound against the euro until we get a signal from Norges Bank or a stronger signal from oil prices.

— Edited by John Acher