Currency traders continue sitting on the sidelines, with some trying to benefit from tight range-bound trading ahead of key ECB policy meeting on Thursday.
USDJPY found a reason to break above 120, for the first time in six days, as weak data from Japan supported the move. Japans economy created another deficit as exports faltered, posting a trade gap of ¥114.5B versus the forecast of ¥84B surplus. This is the sixth monthly deficit in a row, and of the past 29 months, only March 2015 saw a surplus. Those figures boosted the Nikkei to trade 1.9% higher on what we call bad news is good news for equity markets, and would likely add pressure for further stimulus from the central bank although Bank of Japan Governor Haruhiko Kuroda is not hinting for further stimulus policies in the foreseeable future.
After rallying for three consecutive weeks and named the top performing currency, the Kiwi reversed direction. NZDUSD rallied 9.2% in 15 trading days from 0.6268 to 0.6845 and traders are probably wondering whether the rally is over after four straight days of decline. The New Zealand currency is very sensitive towards dairy prices and as Fonterra’s GTD Price index slipped 3.1% and prices for whole milk powder dropped 4.6% NZD bulls moved out of the way. If diary prices didn’t manage to go up and we continue to see further weakness in the Chinese economy, this would lead for further weakness in the NZDUSD and a short term test of 0.6560 (50% retracement from 0.6233 – 0.6896) very likely in the short term.
The Canadian dollar moved higher yesterday after a majority Liberal government was elected. Liberal leader Justin Trudeau promised to run three years of deficits to invest in infrastructure and help stimulate the fragile economy. Running deficits is usually negative news for a currency but implementation of fiscal policies take time and on the other hand, this would reduce pressure on Bank of Canada to cut rates further. BoC is meeting today and after lowering interest rates two times already in 2015 a third reduction is very unlikely; however, Governor Poloz might sound more dovish as latest data releases showed weakness in employment, inflation, housing, and trade figures, and of course he would not like the idea of further Loonie appreciation.
For the second time in a week, the pound failed to break above 1.55 against the dollar. BoE’s Ian McCafferty speech yesterday in London urging the central bank to raise interest rates fell on deaf ears. McCafferty was the only dissenter in last BoE meeting as his eight colleagues voted to keep interest rates unchanged. His worries is the central bank might fall behind the curve as employment growth and improvement in credit conditions raises the risk of inflationary pressures. For GBPUSD to break above 1.55 we need a strong retails sales on Thursday. Will a combination of higher wages and low inflation rates drive consumer spending? This is what we need to see.
The Euro range bound trading resumed for a fourth day with traders’ eyes on ECB’s meeting tomorrow with couple of scenarios anticipated:
- Reducing Interest Rates
- Increasing Stimulus
- Extending QE’s date beyond Sep 2016
- Dovish Statement
ECB data yesterday showed euro zone banks loosened their lending standards more than expected over the last few months, which means QE is working and chances of the first three scenarios is unlikely to take place in Thursday’s meeting. Therefore, focus will turn to the ECB statement and press conference, with any clear signal of future moves. A strong indication of further easing would put the Euro under renewed pressure with EURUSD 1.11 eyed in the short term.