Tighten, Taper, and Unchanged are the Fed, ECB, and BOJ Respectively
Friday 15 June, 2018
Daily Currency UpdateIt’s been a busy week for Central Banks this week, with the Federal Reserve raising rates, the ECB Tapering QE, and as expected the Bank of Japan leaving policy alone. The greenback has seen significant gains this week against the euro it trades stronger by 1.53% and 1.08% against the yen. The greenback's value is positioning to rise further with expectations of more rate hikes from the Federal Reserve later in the year, Chair Powell signaling to market participants that inflation is on the rise as energy prices climb. The Trump administration has approved the 50 billion in tariffs on Chinese goods, expectations are that the technology sector will be hit the most, a refined list will be released later today. Equity futures are pointing to a lower open as trade worries become more of a reality than just words. The US Dollar continued its run following FOMC’s decision to raise interest rates in their June meeting to a range of 1.75-2.00% and was stronger against G10 currencies in overnight movements. Target ranges were upgraded in the Fed statement whereby markets are now pricing in another two 25 basis point hikes by the end of the year to have an average benchmark rate of 2.4-2.5%.
Key MoversEconomic fundamentals for Canada today saw foreign security purchases rise in March to 9.1 billion from the previous of 6.1 billion. Canadian manufacturing shipments m/m for Mar were down -1.3% well off expectations of 0.6% and well below previous of 1.4%. The loonie was not able to take advantage of higher oil and gold prices and ended up weakening around 0.9% versus the greenback on the back of broad USD strength following US strong economic data releases and divergent policy statements from the ECB and the FED. USDCAD posted a new session high at 1.3109 breaking above resistance levels and reaching a new year high. The important 1.32 figure should now act as first resistance and 1.3040 will probably turn now into support on any short-term downside move.
The ECB was at the center of the FX markets yesterday however the central currency endured a torrid day as it suffered heavy losses against both the pound and USD. Indeed EUR/USD returned to levels more familiar in October 2017, and the euro is set for its worst weekly loss in 19 months. While the market had entirely expected Mario Draghi to announce a taper to the central banks quantitative easing package, both the taper and outlook from Draghi was dovish. In many regards, the reaction from the market and the selloff in the euro seems excessive given that Draghi was adopting his usual conservative and reserved manner. While we may have to wait until the end of 2019 for the ECB to finally raise interest rates there remains support on EUR/USD around the 1.15 (IB) handle for the euro to hold on to in the meantime.
Despite the majority of the market looking elsewhere yesterday (towards the ECB), Brexit, Theresa May and rebel Tory MPs couldn’t remain out of the spotlight. Dominic Grieve (chief rebel), announced yesterday that the language of the amendment that he and his colleagues have backed on Tuesday night had been changed and he had been duped. While there are suggestions of some underhand tactics from the government towards the Remain Tory MPs it is another step forward for Theresa May and the flexibility afforded the government decreases the chance of a no deal Brexit scenario. The pound heads into the weekend on the back foot against the dollar while hitting 10-day highs against the euro. Looking towards next week, there is the latest Bank of England meeting and statement; however, unlike the ECB and Fed, this will not be a ‘live’ meeting little is expected. Domestic Brexit updates are becoming more and more frequent over the last few weeks and await next week to be the same.
The Aussie shrugged off a mixed employment reading that ultimately didn’t excite the market either way. In a good headline, the Australian economy saw the unemployment rate fall but also saw the number of employed people added to the economy fail to meet expectations. Macroeconomic events dominated market focus overnight with the stage set initially by the US FOMC. Early yesterday morning, the FOMC released a decidedly hawkish statement that saw the USD surge higher. However, despite the hawkish statement and indeed the US interest rate hike, the Aussie remained relatively resilient. The soft Greenback was then kicked into higher gear when month on month retail sales data was released, posting a significant expansion of retail sales. Closing out a tumultuous day, the ECB then posted a determinedly dovish policy statement, pushing back the expected interest rate hike to September 2019 and driving the USD even higher. The Australian Dollar now looks to take a breath to close out the week with an empty domestic economic calendar ahead. Attention turned to the Bank of Japan and their policy statement release with no change to policy.
The New Zealand Dollar is weaker this morning when valued against the Greenback, losing its traction in the second half of the day, falling below the 0.70 mark as greenback continued to outperform its rivals. The NZD/USD pair reached a 24-hour low of 0.6956, 0.5% on the day, following better than expected US retail sales numbers. Looking ahead today in New Zealand and the domestic calendar is relatively light with just the Business NZ PMI (Manufacturing Index) which is considered to be a good indicator of the overall economic health in New Zealand. The result, manufacturing expansion in May came back down to more steady levels of expansion. The seasonally adjusted PMI for May was 54.5 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 4.6 points lower than April, but still the third highest result over the last six months. From a technical perspective, the NZD/USD pair is currently trading at 0.6972. We continue to expect support to hold on moves approaching 0.6977 while now any upward push will likely meet resistance around 0.7000.
- USD/CAD: 1.3110 - 1.3201 ▲
- EUR/USD: 1.1543 - 1.1615 ▼
- GBP/USD: 1.3212 - 1.3292 ▼
- AUD/USD: 0.7453 - 0.7480 ▼
- NZD/USD: 0.6928 - 0.6977 ▼