- US growth is clearly being driven by consumer consumption with personal and household consumption setting the pace
- The greenback was little changed despite sharp moves following the release of the core personal expenditure gauge
- Kiwi best performing G10 currency thanks to a song rise in business confidence in September. The Kiwi surged 0.50% against the greenback, up to $0.7280 as the ANZ business confidence gauge rose to a 17-month high
- The inability of the Federal Reserve, and the main central banks in general, to lift interest rates could continue to nudge investors towards higher-yielding assets such as commodity currencies, equities and commodities
- Japan: Latest inflation report from the Japanese Ministry of Internal Affairs shows that deflationary pressures remained strong in August with the BoJ’s favourite indicator contracting 0.5%y/y versus -0.4% median forecast. All in all, the persistent deflationary pressures will keep the BoJ on its guard.
- After last week’s market friendly monetary policy action (or non-action), it seems as though central bank credibility has hit a new low with comments from Yellen, Draghi and Kuroda being simply shrugged off
- With no central bank manipulations we anticipate that USDJPY will trade down to 100 in the near term
- Despite probability of December hike now at 57%, traders are unlikely to follow the carrot after a whole 9 months of bait and switch
- Without the threat of an impending rate hike and our desk view of a no hike in December, it is likely that the USD will remain a funding currency
The latest batch of economic data from the US released yesterday was a mixed bag, with the third estimate on second quarter GDP printing slightly above the median forecast. The US economy expanded at an annual pace of 1.4% in Q2, beating the median forecast of 1.3%. On the other hand, personal consumption was revised slightly lower to 4.3% q/q (seasonally adjusted annual rate) compared with a prior estimate of 4.4%. US growth is clearly being driven by consumer consumption with personal and household consumption setting the pace. On the inflation front, the core personal expenditure gauge came in in line with the consensus, printing slightly below the Fed target at 1.8% (q/q saar). In spite of some sharp moves following the release, the greenback was little changed as this latest report does not reveal the bigger picture. EUR/USD fell to 1.1197 after the release before bouncing back to 1.1250. Since the beginning of the month, the pair has been desperately trading within the tight 1.1123-1.1350 range.
Overnight, the New Zealand dollar was the best performing currency among the G10 complex amid a strong increase in business confidence in September. The ANZ business confidence gauge rose to a 17-month high at 27.9 from 15.5 a month ago, while the activity outlook soared to 42.4 from 33.7 in August, its highest level since July 2014. The Kiwi surged 0.50% against the greenback, up to $0.7280. On the technical side, NZD/USD was unable to break the strong 0.7335 resistance level (Fibonacci 38.2% on 2009-2011 rally). A retracement toward the 50% Fibonacci level at 0.6869 seems more and more likely, especially against the backdrop of further monetary easing from the Reserve Bank of New Zealand. On the other hand, the inability of the Federal Reserve, and the main central banks in general, to lift interest rates could continue to nudge investors towards higher-yielding assets such as commodity currencies, equities and commodities.
After surging to 101.78 amid a worse than expected inflation report for August, USD/JPY returned to 100.76. The latest inflation report from the Japanese Ministry of Internal Affairs shows that deflationary pressures remained strong in August with the BoJ’s favourite indicator contracting 0.5%y/y versus -0.4% median forecast. The gauge, which excludes volatile components such as fresh food and energy, was down 0.1%y/y versus +0.1% consensus. All in all, the persistent deflationary pressures will keep the BoJ on its guard. On the bright side, industrial production rose 4.6%y/y in August, well above consensus of 4.6%. So far, USD/JPY has been unable to break the 100.00 support level as a move significantly below that threshold would force the BoJ to step in.
Peter Rosenstreich, head of market strategy: Sell USDJPY: It feels like the Fed and BoJ have now left the building. After last week’s market friendly monetary policy actions (or non-action), it seems as though the credibility of central banks has hit a new low, just like the FX markets sensitivity to their comments. Despite a heavy speaking schedule, comments by Yellen, Draghi and Kuroda that only a few days ago would have had volatility swinging, were just shrugged off. Instead, the news cycle was filled with second string stories of Deutsche Bank stock collapse, OPEC micro supply tuning and the US presidential debate, which hardly filled the void. With no central bank manipulations we anticipate that USDJPY will trade down to 100 in the near term.
US 2-year yields are range bound with real yields falling as expectations for higher inflation on the back of strong oil prices. The probability of a December interest rate hike has increased to 57% as US data continues to firm. However, traders are unlikely to follow the carrot after 9 months of bait and switch. In addition, there are signals that the US economy is heading into a soft patch. At Yellen’s semiannual testimony before the House Financial Services Committee, there followed the usual pattern of defending a Q4 rate hike, yet stating that there was no ”fixed timetable”. Even Fischer's speech, which highlighted the risk of misallocation of capital should interest rate remain ultra-low failed to significantly drive hike expectations. Without the threat of an impending rate hike and our desk view of a no hike in December, it is likely that the USD will remain a funding currency.
Kurd emphatically stated that the BoJ will adjust policy when necessary and may include expansion of monetary policy. However, his comments simply fell on deaf ears. The BoJ's comprehensive assessment saw the focus of its easing strategy go from size domination to negative rates with yield curve control. While the tactic of negative rates looks to have the desired currency effect, judging from the European and Swiss experience, we expect JPY appreciation to slow but not stop. Even an interest rate cut in November (which we do not expect) is unlikely to reverse the bearish trend. Prime Minister Abe, in front of parliament, stressed the working partnership of the government and the BoJ indicated that tighter coordinated fiscal and monetary policy is likely the next response.