Behind the Yen's Strength & RBNZ - What to Expect
These days, all of the action in the forex market seems to be driven by the moves in Asia. Last night, the Japanese Yen soared against all of the major currencies and held onto its strength throughout the London and NY trading sessions. Investors are buying Yen because the Bank of Japan may be more inclined to tighten monetary policy than their previous actions suggested. The minutes from the last BoJ meeting was released last night and according to the report, one member felt that a wider range for the long-term yield would be necessary which is hawkish that resulted in today's Yen rally.
The question now is whether the views of one policy maker could have a lasting impact on USD/JPY and the answer lies in yields and the Yuan. 10 year JGB yields fell today but the yield curve is steepening, attracting demand back into Japan. If short or long-term rates continue to rise so should the Yen but if Japan's curve flattens, then the Yen could resume its slide.
Although the Yen shrugged off last night's Yuan weakness, China's currency and its markets will be important watch because big moves will have a direct impact on USD/JPY. In the near term, the pair is slowly moving lower but there's a lot of support between 110.60 and 110.80. We finally get some U.S. data tomorrow with producer prices scheduled for release. The stronger dollar and the recent decline in oil prices may have eased PPI growth and if that's true, USD/JPY could test its support levels.
The immediate focus will be the Reserve Bank of New Zealand's monetary policy announcement. Although the New Zealand dollar rose slightly ahead of the rate decision, in the grander scheme of things, NZD/USD is hovering at 2 year lows and AUD/NZD is near 7-month highs. We believe the RBNZ will keep the door open for future easing.
When they last met in June, they left interest rates unchanged and said they are well positioned to manage a rate change in either direction. They also tweaked the wording of the statement slightly to suggest that they could change interest rates and the fact that NZD/USD dropped to a 2 year low following the announcement reflects the fear that the next move could be a rate cut. Unfortunately New Zealand's economy only worsened since then.
Card spending is up but consumer and business confidence declined. Service and manufacturing sector growth slowed significantly while the trade surplus turned to a deficit. Inflation increased but dairy prices are down. The only saving grace is the weakness of the New Zealand dollar. It helps to make NZD dairy more attractive on the global market and more affordable to Chinese importers who are grappling with Yuan weakness.
With that in mind, the lack of improvement in dairy prices and China's troubles gives the RBNZ has very little reason to be optimistic. Having just tweaked the language in their monetary policy statement at their last meeting, they still want the market to believe that a return to easing is possible.
Both the Australian and New Zealand dollars shrugged off China's mixed trade balance report. Although the country's trade surplus fell, imports and exports rose strongly. There's still a lot of talk about more trade tariffs but for the time being the Australian dollar is taking the risks in stride.
Comments from RBA Governor Lowe last night were also optimistic. While he felt that an escalation of the trade war would be damaging for the world economy, he believes that the most likely scenario is for the economy to continue on its current track. Lowe is confident that inflation will get back to 2.5% and if the outlook stays favorable he believes that the next rate move will be up. With that in mind he made it clear that there is no strong case for near term adjustment in policy, which means they maintain a neutral policy for the time being.
For USD/CAD on the other hand, 1.31 was broken almost as quickly as it was rejected. Data from Canada missed the mark with building permits falling -2.3% and while this is not the most important Canadian economic report, it was catalyst that took USD/CAD to a high of 1.3120. However, there's a lot of resistance at 1.31 and with the market looking for the Bank of Canada to raise interest rates this year, the rally was met with sellers quickly.
Yet if oil prices continue to fall, it will be difficult for the Canadian dollar to rally. Oil plunged 4% intraday to a 7 week low on the back of a smaller than expected drop in crude stockpiles. China also threatened to impose 25% tariffs on U.S. goods that would include fuel oil, petroleum and diesel products. They are putting a lot of pressure on the U.S. energy sector after having already imposing tariffs on U.S. crude and liquefied natural gas imports.
The euro ended the day unchanged while sterling extended lower against the U.S. dollar for the seventh consecutive trading day. This divergent performance took EUR/GBP to its highest level since October 2017. There was no specific news to drive sterling's slide but there's no doubt that the market's concerns about Brexit are growing. As noted by our colleague Boris Schlossberg, cable "now trading on momentum as lack of news has emboldened the shorts to probe the lower edges of long-term support, but the trade in the pair is highly susceptible to headline risk, so any hint of compromise could quickly push it above the 1.3000 level in a furious short covering rally." With no U.K. data on the calendar tomorrow, momentum will continue to drive the currency's flows.