- USD reversed losses in the late European session on mounting expectations of a Fed rate hike in September as officials highlight the central bank’s penchant for a rate hike before the end of the year
- As a consequence, traders rushed into the greenback and sold their long JPY positions, pushing USD/JPY back above the 101 threshold although the currency has been unable to break the strong resistance that lies at the 100 threshold to the downside
- NZDUSD: We expect the pair to trade with a negative bias as rising expectations of a tightening move from the Fed would keep pressure on the currency pair
- The ruble may continue to appreciate and 62 ruble for one dollar represents a decent target in the short-term
- This ruble current strengthening is due to investor hunger for for yields and while most western rates are negative or almost so, the ruble definitely represents a very good opportunity and looks still undervalued
- The Central Bank of Russia should now attempt to limit upside pressures on its currency. We expect a cut of the key rate towards 10% at the September 16th meeting and an even deeper rate cut is also a possibility
After suffering a broad sell-off against most G10 currencies, the US dollar reversed losses in the late European session on mounting expectations about a Fed rate hike in September as Fed officials highlighted the central bank’s penchant for a rate hike before the end of the year. New York Fed President William Dudley warned that investors are underestimating the probability of a rate hike, adding that he thought it possible that the Fed would start to increase borrowing costs as soon as September. Later on that day, Atlanta Fed President Lockhart reiterated his confidence the US economy, saying that growth would accelerate in the second part of the year and that it would justify a “serious discussion of a rate increase”. Consequently, the USD bounced back as September rate hike probabilities - extracted from Fed funds futures - climbed back to 22% from 18% on Monday.
The hawkish comments shifted the entire yield curve higher with the monetary policy sensitive 2-year treasury yield jumping 6bps to 0.75%, while 10-year yields rose 7bps to 1.57%. As a consequence, traders rushed into the greenback and sold their long JPY positions, pushing USD/JPY back above the 101 threshold. Once again, the currency was unable to break the strong resistance that lies at the 100 threshold to the downside (previous lows and psychological levels).
The New Zealand dollar was the second biggest loser among the G10 complex as it fell 0.37% against the greenback in spite of a solid jobs report for the second quarter. Indeed, the unemployment rate fell more than expected to 5.1% in the June quarter (versus 5.3% median forecast and a downwardly revised figure of 5.2% in the previous quarter). In addition, the participation rate rose to 69.7% from 68.8% in the first quarter after Statistics New Zealand modified the way it collects data. The strong improvement in the unemployment rate must be taken with a grain of salt as it represents a break in the series. NZD/USD was off 0.42% in Tokyo, down to 0.7250 from 0.7322 in the early Asian trading session. The Kiwi had several attempts to break the strong 0.7350 resistance area and is now moving lower as buying interests fade away. We expect the pair to trade with a negative bias as rising expectations of a tightening move from the Fed would keep pressure on the currency pair.
Yann Quelenn, market analyst: Russian economic data on the rise: "The ruble continues to appreciate and is now at a one-month high against the dollar. Of course there is room for further upside due to the ongoing Russian economic recovery. 62 rubles for one dollar represents a decent target in the short-term. This current strengthening is due to the fact that investors are looking for yields and while many western rates are negative or close to negative, the ruble is definitely a very good opportunity and looks still undervalued.
Secondly, the current rebound in oil prices is driving investors towards Russia as its economy relies significantly on the black commodity. Today, July retail sales will also be released and markets estimate a sharp increase with a 2.9% m/m push. On an annualized basis retail sales growth should remain deeply negative below -5% y/y because of last year’s strong downturn and the collapse of oil. Unemployment data is also expected today and should nonetheless remain below 5.4%.
As a result, it seems that the Russian economy is recovering well. The Central Bank of Russia should now attempt to limit upside pressures on its currency. We expect a cut of the key rate towards 10% at the September 16th meeting. A deeper rate cut may also be anticipated.”---
Today traders will be watching the UK jobs report, ZEW survey from Switzerland; MBA mortgage application, crude oil inventories and July FOMC minutes from the US; unemployment rate, CPI and retail sales from Russia.