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USD/JPY Trades Lower Ahead BoJ, FOMC

Published 2016-09-19, 06:48 p/m
Updated 2023-07-09, 06:31 a/m

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

We’ve had a quiet start to what should be a very busy week in the foreign-exchange market. Japan was closed for holiday and with no major U.S. economic reports released, U.S. equities weaved in and out of positive territory. The greenback traded lower or held steady against all of the major currencies as 10-year yields ended the day unchanged. While investors are biding time ahead of Wednesday’s Federal Reserve announcement, they are also weary of holding dollars given the unlikely chance of a rate hike this week. At this stage, what’s important is not so much what the Fed does with rates (because everyone expects they will do nothing) but rather how committed they are to raising interest rates before the end of the year. There is no question that the central bank will recognize the improvements in the economy and the easing of global risks, but if the Fed stands down in September, the dot plot forecast will have to change to reflect only one rate hike this year. This, along with a decision to hold rates steady, should be initially negative for the dollar but if more than 1 member of the FOMC dissents from steady rates and Janet Yellen repeats what she said at Jackson Hole -- which is that the case for a rate hike has strengthened, the dollar will soar.

In our opinion, the bigger question mark lies with the Bank of Japan, which has a history of making surprised monetary policy moves.
Recent economic reports show that Japan’s economy continues to struggle and despite the Japanese government’s persistent stimulus programs, there’s been very little positive momentum. News reports noted that the BoJ may consider delving deeper into negative rates and if they are right, this unexpected easing will send the yen sharply lower. But if the central bank’s hands remained tied for another month, the yen will rise in disappointment. We believe the chance of the BoJ changing policy materially is slim and at the end of the announcement, investors will end up disappointed once again.

Meanwhile the decline in the dollar drove all three of the commodity currencies lower.
Oil got a shot in the arm Monday and rose over 1% as Venezuelan President Nicolas Maduro said that both OPEC and non-cartel members were close to a deal to stabilize oil supply. In addition to welcomed news about a possible supply freeze, unrest in Libya also helped to boost oil prices. Military unrest in Libya has affected the country’s eastern crude oil ports, delaying supply from the country.

The best-performing currency was the Australian dollar. The Aussie bounced off the 100-day SMA, around the 0.7450, to rally above the 0.75 level.
Chinese data helped to boost the Australian dollar as the country reported upbeat housing data. Chinese house prices increased 9.2% vs. 7.9% the prior period. The Reserve Bank of Australia was set to release the minutes from its last meeting Monday evening. If you recall, the RBA statement was relatively neutral with the central bank saying “recent data suggest that overall growth is continuing, despite a very large decline in business investment, helped by growth in other areas of domestic demand and exports. Labour market indicators continue to be somewhat mixed, but suggest continued expansion in employment in the near term.” If this sentiment is echoed in the RBA minutes, AUD could see further gains versus all of the major currencies. The New Zealand dollar also found support from data. NZ PMI Services increased from the prior period, reporting a reading of 57.9 vs. 54.5 in July. Westpac Consumer Confidence also showed an increase in the third quarter with a reading of 108 vs. 106 the prior period. The RBNZ meets later this week and having just lowered rates in August, no changes are expected.

After last week’s breakdown, EUR/USD now finds itself confined between the 100 and 200-day SMA. There are no major Eurozone economic reports scheduled for release until Friday, so the main driver of Euro will be the market’s appetite for U.S. dollars. Sterling, on the other hand, gave up earlier gains after Bundesbank head Weidmann said the U.K. would lose financial passporting rights if it leaves the European Economic Area (EEA). These rights are important because they are tied to the country’s ability to conduct business across the union and would force many London based firms to move their offices elsewhere. After a few months of calm, Brexit headlines are starting to return and they remind investors of the harsh consequences of leaving the Union. With this in mind, we believe EUR/GBP is poised for further gains as the headlines draw investors away from sterling.

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