Dollar ended the week broadly lower as the weakest major currency as Q2 GDP data could have closed the door for a rate hike in September. Canadian dollar followed as dragged down by weakness in crude oil where WTI extended recent fall to close at 41.38. Meanwhile, Japanese yen ended as the strongest major currencies after BoJ disappointed the markets and underdelivered. Aussie and Kiwi followed yen higher as markets pared back bets of an RBA rate cut. The markets will now enter into another important week with RBA and BoE meeting. Also, US will release ISM indices as well as the higher anticipated non-farm payroll report.
Fed fund futures are now pricing in 12% chance of a September Fed hike and 33% chance of December hike after GDP data. Q2 GDP grew a mere 1.2% versus expectation of 2.6%. San Francisco Fed president John Williams tried to talk down the significance of the data and said "there's definitely a data stream that could come through in the next couple of months that I think would be supportive of two rate increases." Dallas Fed president Rob Kaplan also said that he wouldn't "overreact to one data point," and "we're still hopeful for solid GDP growth this year, and the basis for that is the consumer." But after the GDP disappointment, this week's NFP will be even more crucial to dollar's fate.
Earlier in the week, FOMC voted 9-1 to leave the Fed funds rate unchanged. However, policymakers sent a more hawkish message, citing stronger labor market and household spending growth. They also noted that near-term risks to the economy have diminished. Yet, they remained concerned about inflation and inflation expectations. The Fed left the door open for a rate hike this year. In our opinion, the chance of a September hike has increased but the Jackson Hole symposium on August 26 should send a more definitive signal about the next move. More in Fed Stays Put, Turns More Hawkish, Thanks To Job Market Improvement.
Yen surged after BOJ announced fewer than expected stimulus measures in July. The central bank voted 7-2 to raise ETF purchases to an annual pace of about 6 trillion yen, from 3.3 trillion previously. All other measures stayed unchanged: BOJ will purchase Japanese government bonds (JGBs) at an annual pace of about 80 trillion yen .It would also purchase J-REITs, CP and corporate bonds, at annual paces of about 90 billion yen, about 2.2 trillion yen and about 3.2 trillion yen, respectively. The IOER rate stayed unchanged at -0.1%.BOJ also trimmed its CPI forecasts, indicated in its quarterly report. This came in below our expectations of an IOER rate cut to -0.3%, and acceleration the qualitative part of its QQE by raising purchases of ETFs and J-REITs from the current 3 trillion yen and 9 billion yen, respectively. More in BOJ Under-Delivers…
RBA rate decision is the first focus of the coming week. Better-than-expected underlying CPI in Australia might buy RBA some time before rate cut. As mentioned in the July meeting minutes, "further information on inflationary pressures, the labour market and housing market activity would be available over the following month and that the staff would provide an update of their forecasts ahead of the August Statement on Monetary Policy. This information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate". We retain the view that the chance of a -25 bps rate cut in August stays above 50%. Delaying the move would add strength to Australian dollar, leading to an inevitable rate cut in November. More in RBA On Crossroad.
BoE meeting with be another major focus of the week. BoE governor Market Carney said clearly after the Brexit referendum that the central bank will ease policy again. But the extent of easing would depend on the new economic projections in the quarterly inflation report, to be release this week. There are expectations that BoE would cut interest rate again for the first time in seven years. from 0.50% to new record low of 0.25%. The question is on whether BoE would do more, like raising the asset purchase target from GBP 375b.
Regarding trading strategy, our GBP/USD was stopped with 1.33 hit. And we'll close the AUD/USD short position first. Yen strength would likely continue this week as the both risks of fiscal and monetary stimulus were cleared. USD/JPY seems to be a good choice for selling but the fortune of dollar could be turned by the string of key economic data. So we'll avoid dollar pair first. Considering the technical development GBP/JPY's recovery should have completed at 143.21 and the cross is heading to retest 128.86 low. There is chance that BoE would deliver more than just a rate cut. Thus, we'll sell GBP/JPY this week with a stop placed at 140.