The Federal Open Market Committee statement was in line with our highest-probability scenario, i.e. one in which the Fed said as little as possible and clearly wished to leave guidance up to the incoming data.
The FOMC accomplished a balanced statement by downgrading its description of the economy, but by underlining that it retained the hope that this was merely a weak patch that would yield to moderate growth down the road. US two-year rates were almost entirely unchanged coming into this morning, so there was no further immediate fuel to drive a continuation of the squeeze on USD longs which gathered pace after yesterday’s very weak Q1 GDP report.
Surprising that the market was at all shocked by the Bank of Japan not really showing any signs of leaning toward new stimulus as prime minister Shinzo Abe is on a tour of the United States. Abe’s speech yesterday before the US Congress had no real impact for financial markets as the focus was on the Trans-Pacific-Partnership trade deal, where Abe hopes that the “goal is near”.
As for the Bank of Japan, there was no material change in the statement and the lone dissenter, Takahide Kiuchi, once again argued for a reduction of the rate of BoJ purchases. The JPY pulled back much stronger after taking a broad beating and USDJPY was back pushing on support as of this writing, with other JPY pairs looking technically interesting for bearish reversal setups (including NZDJPY in particular).
The follow-up report with the latest projections from the BoJ out later this morning maintains that the inflation target of 2% will be reached in the 2016 financial year.
Speaking of NZD, the Reserve Bank of New Zealand was sufficiently dovish to trigger a further selloff in NZD pairs, as governor Graeme Wheeler more clearly indicated that a cut to the official cash rate would be “appropriate… if demand weakens and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.”
Wheeler also complained that the NZD is “unjustifiably high” and unsustainable. AUDNZD achieved the major 1.05000 milestone overnight and will be ready for plenty more upside to come if the RBNZ moves toward those rate cuts at coming meetings, even if the near term potentially brings retracements back lower (as much of this dovish RBNZ shift was priced into AUDNZD before the meeting).
Today will be about watching if the JPY gets something bigger cooking as USDJPY is clearly under pressure this morning after the BoJ. Elsewhere, it is about whether we see simple consolidation in the other USD pairs or whether the USD is going to mount a fresh rally attempt.
These are questions that may take some time to answer as we have key data through next Friday’s US employment report to which the market will be highly reactive.
Chart: EURUSD
The break of the local resistance zone of 1.1000/50 is clear, and this is now support, but it is interesting to note the previous major low around 1.1100 putting up a bit of a fight on a daily closing level basis. We’ll probably need to see clearly negative data from the US from here to keep this squeeze alive.
Chart: NZDJPY
A dramatic whiplash overnight here as RBNZ shifted to a more explicitly dovish stance while the BoJ failed to wax dovish (which the market had priced in). This is one of the more compelling charts at the moment for looking for additional JPY strength.
The G-10 rundown
USD: The FOMC failed to accelerate the panicky squeeze in USD longs coming into the meeting, and it will likely take distinctly bad data to drive the USD broadly weaker from here. The first data points up are today’s PCE inflation data and weekly jobless claims and then tomorrow’s more major ISM Manufacturing survey for April.
EUR: Little to drive the euro higher except for any relative positioning squeeze on bad news elsewhere. Watching the 1.1050/1.1000 are in EURUSD as the new line in the sand for whether this move higher can continue to find fuel.
JPY: Interesting to see whether the JPY is making a more dramatic pivot back to the strong side here as USDJPY key support is under pressure. And even if USDJPY support survives, the tendency for USD and JPY to correlate could mean JPY upside might remain interesting in pairs like NZDJPY and AUDJPY.
GBP: Sterling is absurdly overbought after touching 1.5500 yesterday – still, it could test the 1.5550 area before it finds plenty of room for consolidation back toward 1.5200 without even threatening the uptrend. EURGBP remains a mystery and will be reactive to UK data next week as the technical momentum lower is not in evidence.
CHF: 1.0500 proved a bit of a barrier to the upside for EURCHF, while the USDCHF suffered a technical break of 0.9500, which must be reattained for USD bulls to get involved again, as a break is a break. See little upside potential for CHF unless the Greece situation takes a turn for the worse.
AUD: AUDUSD found rather hard resistance yesterday near the old cycle lows ahead of 0.8100. The move is locally impressive, but what’s the upside for AUD except for further pessimism on the US? Still, the bears need to see the pair crumbling back below 0.7900 to build a downside case.
CAD: Watching GDP today – 1.2000 proved a support level after all despite yesterday’s huge slippage. If this level can’t hold the line, the focus may shift to the 200-day moving average coming up from the 1.1700 area.
NZD: The kiwi has been mortally wounded, and after the RBNZ’s dovish shift, the focus will be on where to short it. AUDNZD may be short term overbought, but still looking for potential toward 1.10+ there in the months ahead. Shorter term, consider NZDJPY and even NZDUSD downside.
SEK: The reaction to the Riksbank keeps focus on SEK upside – watching the 9.2250 area support in EURSEK. Interesting action in the likes of USDSEK and GBPSEK as well as those tremendous former bull trends are facing serious headwinds.
NOK: Little interest as we have lost momentum to the downside amid the EURUSD squeeze.
Economic Data Highlights
- New Zealand RBNZ left Official Cash Rate unchanged at 3.50% as expected
- Japan Mar. Preliminary Industrial Production out at -0.3% MoM and -1.2% YoY vs. -2.3%/-3.4% expected and vs. -2.0% YoY in Feb.
- Japan Bank of Japan left Monetary Base growth target unchanged at ¥80T/year as expected.
Upcoming Economic Calendar Highlights (all times GMT)
- Germany Apr. Unemployment Change and Unemployment Rate (0755)
- Euro Zone Mar. Unemployment Rate (0900)
- Euro Zone Apr. CPI Estimate (0900)
- Canada Feb. GDP (1230)
- US Mar. Personal Income/Spending (1230)
- US Mar. PCE Deflator/Core inflation (1230)
- US Weekly Initial Jobless Claims (1230)
- US Apr. Chicago Purchasing Manager Survey (1345)
- Australia Apr. AiG Performance of Manufacturing Index (2330)
- Japan Mar. Jobless Rate (2330)
- Japan Mar. Overall Household Spending (2330)
- Japan Mar. National CPI (2330)
- New Zealand Apr. QV House Prices (000)
- China Apr. Manufacturing and Non-manufacturing PMI (0100)