- Now that the Fed has clearly stated that current conditions do not justify a summer rate hike, the probability of getting two hikes this year have fallen to zero
- We anticipate EUR/USD to gain momentum and to return toward 1.15 in the short-term
- UK: Traders continuing to buy protection against further GBP depreciation ahead of the Brexit vote
- Japan, capitals keep flowing into the country, increasing upside pressures on the Japanese currency and making it even more difficult for the Bank of Japan to reach an inflation target of 2% within the next two years
- Governor Kuroda will meet next week to discuss monetary policy. It is likely that further stimulus will be added in an effort to foster inflation
- We remain bearish on the USDJPY as BoJ cannot do much more than what it is currently doing, therefore we believe the upside potential on the pair is limited for the time being
Yesterday's speech from Janet Yellen was the last before the June 14-15 FOMC meeting. Investors were therefore doing their best to guess the timing of the next rate hike. To put it mildly Janet Yellen was not of great assistance as she did not provide any clues. She did however repeat her view that the US economy is on the right path and that she sees “good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones”. Most USD crosses did not react much to Yellen’s speech; however EUR/USD made some sharp moves during the speech. EUR/USD initially fell to 1.1326 before bouncing up to 1.1393 and finally stabilised at around 1.1360. Now that the Fed has clearly stated that current conditions do not justify a summer rate hike, the probability of getting two hikes this year has fallen to zero. Moreover, we would even be lucky to get a just single one. In such an environment we anticipate EUR/USD to gain momentum and to return towards 1.15 in the short-term.
In Australia, after cutting rates in May, the Reserve Bank of Australia has decided to keep the cash rate target unchanged at a record low of 1.75%. The decision was widely expected; however the market had priced in that Governor Stevens would reiterate its dovish bias. In that light, it was a disappointment and the market’s reaction was quick. AUD/USD jumped 1% to 0.7438 after the announcement, reaching its highest levels since May 6th. The pair is moving toward the next resistance that currently lies at 0.7474 (50dma). On the medium-term, the pair remains within its bullish bias; however in the long-term the Aussie is still trading within a declining channel. On the downside, a strong support can be found at 0.7145 (low from May 24th).
In the UK, the 1-month 25 delta risk reversal (volatility difference between 25 delta calls and puts) fell to -6.8% this morning as traders continued buying protection against further GBP depreciation ahead of the Brexit vote. The volatility on the 1-month ATM option continued to climb further and hit 22.25% during the Asian session. GBP/USD spot trading was also very volatile in Tokyo with the pair jumping 1.25% to 1.4660. Rumours have been circulating that a fat finger may have caused the move. In any case, the cable’s reaction suggests that the liquidity is very thin and that traders are worked up.
Yann Quelennm market analyst: Money flows into the yen: 2016 has seen the current account of Japan's Balance of Payments increase drastically. April data, which is expected tonight is expected to be narrow, around yen 2’303 billion from yen 2’980 billion. Capital continues to flow into the country, increasing upside pressures on the Japanese currency. As a result, it is going to be even more difficult for the Bank of Japan to reach an inflation target of 2% within the next two years.
Also tonight, financial markets also expect an upward revision from the Q1 GDP to 0.5% q/q from 0.4% q/q. Even if there is such a slight increase, this does not structurally change the deflationist nature of the Japanese economy. Governor Kuroda will meet next week to discuss monetary policy options and it is likely that further stimulus should be added in an effort to foster inflation. The global slowdown is pushing many central banks to lower rates. The BoJ is one step ahead and is almost compelled to act or the country may face a recession. We remain bearish on the USDJPY. The BoJ cannot do much more than what it is currently doing, so we believe that the upside potential on the pair is limited for the time being.
Today traders will be watching foreign currency reserves from Switzerland; industrial output from Spain; industrial production from Norway; GDP from the Euro zone; BoE Carney’s speech at Alberta University.