🧐 ProPicks AI October update is out now! See which stocks made the listPick Stocks with AI

Currencies Wobble As BoE, RBNZ Disappoint

Published 2017-05-11, 02:30 p/m
EUR/USD
-
GBP/USD
-
USD/JPY
-
AUD/USD
-
USD/CAD
-
NZD/USD
-
AUD/NZD
-
NZD/CHF
-
DX
-
CL
-

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The Bank of England and Reserve Bank of New Zealand’s monetary policy announcements proved to be a big disappointment in terms volatility. Outside of the immediate reaction, there was very little follow through, even though both central banks failed to live up to expectations. Investors bought sterling and kiwis in the days ahead of the rate decisions and sold them hard after policymakers in both countries downplayed recent improvements and opted for cautiousness. Although there was limited follow through in the NY trading session, we believe both currencies will underperform in the coming days.

Starting with the Bank of England, investors believed that the central bank would upgrade its growth and inflation forecasts with Carney recognizing the improvements in the economy. Some even hoped there would be 2 dissents in favor of higher rates, but that was unlikely. Instead, the Bank of England lowered its 2017 GDP forecast to 1.9% from 2% and attributed the entire recent pickup in inflation to the weak currency. In his speech, Carney focused on weak household spending and GDP, emphasizing that domestic costs and wages remain subdued. He also feels that while wage growth will most likely accelerate, the pickup is not expected to be exceptionally fast. Yet the central bank’s outlook was not entirely sanguine and for this reason, the immediate losses in sterling have been limited. Aside from their expectations for stronger wage growth, BoE also expects the output gap to close on time and for global demand to support trade activity. As such, the U.K. may need tighter policy than the yield curve implies as more upside news would push others to support a hike. With that in mind, the central bank’s forecasts are based on a rate increase by the fourth quarter of 2019. So while the central bank sees the improvements in the economy, it doesn't want to sound overly optimistic because everything hinges on a smooth Brexit. With that in mind, 1.30 should hold as resistance in GBP/USD as the pair slowly grinds lower.

The Reserve Bank of New Zealand also ignored all of the recent improvements in the New Zealand economy and instead warned that “uncertainties remain and policy may need to adjust.”
It doesn't believe that the recent pickup in inflation is durable as there is no evidence of accelerating wage growth according to RBNZ Governor Wheeler. There’s less capacity pressure in the economy and as a result, policy will remain accommodative for a considerable period. Rate hikes are off the table until “inflation expectations rise” and there’s no sign of that at this time. Although the New Zealand dollar did not extend its losses during the European and North American trading sessions, the central bank’s dovish bias should keep NZD under pressure. We still think 68 cents could be tested but expect greater weakness for the currency versus AUD and CHF. While the Australian dollar traded slightly higher on the back of AUD/NZD flows, USD/CAD erased all of its overnight losses to end the day near its lows. The overnight decline in the Canadian dollar was driven by Moody’s decision to downgrade 6 of Canada’s largest banks. However a rebound in oil during the NY session helped fuel a recovery in the loonie. For the time being there appears to be rock-solid resistance at 1.38 but USD/CAD needs to drop below this month’s low of 1.3640 to confirm a top. Otherwise, a move back up to 1.40 remains a possibility.

There was very little consistency in the U.S. dollar, which traded lower against some currencies and higher versus the others. USD/JPY, in particular, struggled to stay above 114 despite better than expected U.S. data. Producer prices grew at its fastest pace in 3 months and that took the annualized rate to its highest since 2012. However a large part of the increase can be attributed to rising food and energy costs, which is volatile and not always sustainable. Jobless claims also continued to the fall, reinforcing the strength of the labor market. While USD/JPY shrugged off these reports, they support June tightening, which means on a fundamental basis, USD/JPY is still a buy. Yet the currency pair is being pressured by U.S. rates, which appear to have found some resistance. All of this indecision may be in anticipation of Friday’s U.S. economic reports. Investors have waited almost a week for any meaningful data and on Friday, retail sales, consumer prices and the University of Michigan’s May consumer sentiment report are scheduled for release. With producer prices on the rise, wage growth accelerating and Johnson Redbook reporting a pickup in spending last month, we anticipate strong numbers that should take USD/JPY back above 114.

Despite a yield spread that moved in favor of the EUR/USD Thursday, traders desperately want to fill the 1.0735 gap and so they took the currency pair as low as 1.0838 in morning trade. There was no specific catalyst for the move but the breakdown happened shortly after the U.S. economic reports. Support in the EUR/USD is at 1.0820 and if that level breaks, it could be a swift drop down to 1.0750 and possibly even 1.0730. However if it holds and EUR/USD closes above 1.0850, we could still see the pair drift back up to 1.0950. German GDP and consumer prices are scheduled for release on Friday and could show that growth in the Eurozone’s largest economy slowed in the first quarter given the weakness of retail sales and trade activity.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.