By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The relentless selling of U.S. dollars after Wednesday’s FOMC announcement took USD/JPY into intervention territory and like clockwork, the Bank of Japan responded by bidding up USD/JPY shortly after it hit a fresh 16-month low. In a matter of minutes right around lunchtime in the U.K., USD/JPY jumped nearly 100 pips from its low of 110.67. This is the third time in 2 months that the BoJ stepped in to buy USD/JPY below 111 as they clearly don’t want to see the currency pair trading on the 110 handle. The risk of additional intervention is heightened by counter positioning – according to last week’s CFTC report, yen longs are at the highest level since the financial crisis in November 2008. While the Bank of Japan sounded less pessimistic at this week’s monetary policy meeting, the recent climb in the yen changes things completely. Japanese policymakers may have been looking for the Fed to do the heavy lifting – but Yellen failed to deliver and now the risk is to the downside for the dollar. The ball is in Japan’s court and not only do we expect more jawboning of the currency in an attempt to drive the yen lower, but Japanese officials could take this opportunity to remind investors that rates could be lowered again. At 113, the BoJ has leeway to wait but at 110-111, with the risk of further losses in USD/JPY, they may not be able to forestall easing for much longer. Yen strength is a big problem for Japan’s export sector, especially in an environment of slower growth in China and the Eurozone. If USD/JPY drifts lower again, we expect more aggressive action from the Bank of Japan.
Better than expected U.S. data failed to lend support to the dollar. The current account deficit narrowed, jobless claims held near a 42-year low and the Philadelphia Fed index hit a 15-month high and yet the dollar keeps falling. Janet Yellen’s concerns about the economy made investors skeptical of the Fed’s dot plot forecast – two rate hikes in 2016 is now looking overly ambitious. According to the Fed Fund futures, there’s now only a 66% chance of one rate hike in December versus an 80% chance before the FOMC announcement. In other words the market thinks there will be no more rate hikes this year. While a lot can change between now and the end of the year, it will be some time before the market starts thinking about rate hikes from the Fed.
The best performing currency today was GBP/USD. Sterling climbed to fresh 1 month highs on the back of positive comments from the Bank of England. The BoE left interest rates unchanged and warned about the impact of Brexit on spending but spent more of their monetary policy statement talking about looser financial conditions, strong spending and their concerns about second round CPI effect on wages. While the BoE is in no position to raise interest rates in the near term, their less dovish outlook proved to be extremely positive for the currency. 1.4500 is the next target for GBP/USD followed by the February high of 1.4670.
Better than expected Eurozone data contributed to the rally in EUR/USD. The Eurozone’s trade surplus declined in the month of January but less than anticipated while consumer prices grew 0.2% compared to a forecast of 0.1%. While these reports were not stellar, they were strong enough for EUR/USD to extend its rally. The 2016 high at 1.1376 is now in sight and if this level is broken, then the next stop could be 1.15.
Meanwhile the Swiss National Bank also left interest rates unchanged but unlike the BoE they expressed more concern about the outlook for the economy. They expect a slower recovery in Switzerland, growth in China to slow further, the imbalances in the real estate market to persist and European structural weakness to hamper development. As the Swiss Franc trades higher against the euro and U.S. dollar, the SNB says the currency remains significantly overvalued and pledged to intervene in FX markets again if needed.
The New Zealand and Australian dollars also performed extremely well today thanks to stronger economic data. GDP growth in New Zealand maintained a steady pace of 0.9% in the fourth quarter. Economists were looking for a slowdown especially after the Reserve Bank lowered their GDP forecasts but instead the year over year rate held at 2.3%. In response to this report and U.S. dollar weakness, NZD/USD climbed to its strongest level in 2 months.
Australian employment numbers were also better than expected. Although fewer than expected Australians found new jobs in the month of February, all of the job growth was in full time and not part time work. More importantly, the unemployment rate dropped back down to 5.8%, which was significantly better than the market’s 6% forecast. A lot of this had to do with a lower participation rate but that matter little on a day when investors were looking for a reason to sell U.S. dollars. RBA Assistant Governor Debelle’s comments about the central bank welcoming a lower exchange rate also failed to hurt the currency as the market had been looking for stronger criticism of the recent rise in the Australian dollar.
USD/CAD broke below 1.30 intraday as rising oil prices added pressure on the pair. We continue to look for oil prices to peak near $40 a barrel but in the meantime, the uptrend for both the commodity and the currency is strong. Retail sales and consumer prices are scheduled for release tomorrow and in this type of market environment, softer numbers may not do much damage to the loonie.