Currency Update 21st of September

The first trading session of the week has been light and looking ahead, the day is light on data apart from several central bank speakers. As usual for Monday I recommend reading my currency update in order to stay informed of the latest changes in the market.

USD: The greenback remains the strongest currency in the longer term as the market currently expects the Fed to raise rates in late 2015. The FOMC wants to see a further improvement in jobs and be reasonably confident about inflation tracking towards 2% before increasing the fed funds target rate for the first time in nearly a decade. Core CPI y/y for August was steady at 1.8%, however headline CPI m/m showed deflation of -0.1% and core PCE y/y for July dropped down to 1.2%. This diminishes any confidence the Fed have about raising rates. Recent falls in commodity prices and weakening demand from China are causing a lowering of inflation expectations, which has prompted a risk-off mode and a selloff in equity markets. This market turmoil is likely to diminish the Fed’s confidence to raise rates this year. The Fed kept rates on hold as widely expected and struck a relatively dovish tone at the September 17 meeting, mainly in the context of subdued inflation. Whether the Fed increase rates at all this year will depend on the next series of PCE and CPI readings. The market has scaled back their expectations of a hike this year.

EUR: The currency remains weak medium term due to the quantitative easing program that is underway and expected to continue for at least another 12-18 months. Inflation and growth readings in recent months have failed to show that the economy is recovering at a reasonable rate. Further, the ECB has downgraded their GDP and CPI forecasts and have highlighted the downside risks to inflation. The ECB maintains its dovish stance which keeps pressure on the euro. The euro can however strengthen in the short-term due to unwinding of short EURCNH carry trades which occurs when the yuan is allowed to depreciate, making the trade less attractive.

GBP: Sterling is a long-term bullish currency given expectations to raise rates in early-to-mid 2016. In the most recent MPC statement some majority members saw upside risks to inflation, while also stating that downside risks to global economic activity have “probably increased”, however global developments haven’t “materially” altered the U.K outlook. The most recent CPI reading showed core prices have increased 1% in 12 months, while all-items prices have not increased at all during that period. The failure of headline CPI to turn negative, or core to drop below 1%, indicates that the BOE’s outlook to raise rates in 2016 will remain in play and sterling should stay supported. Today’s labor market report was mixed for July/August with accelerating wages contrasting with some signs of rising joblessness. Accelerating wages, a better than expected unemployment rate, along with a nearly -2000 revision to last months jobless print saw the GBP rally sharply.

AUD: Despite solid jobs numbers and inflation close to target, Australia is beginning to feel the effects of lower commodities; recent GDP figures for Q2 missed estimates. Further a slowdown in China – a major importer of Australian minerals – puts negative pressure on the economic outlook. The RBA are on hold with an easing bias. Job figures for August were positive for the AUD and further illustrate the divergence between positive national data but slowing demand for commodity exports.

NZD: The Kiwi dollar is one of the most bearish currencies at present due to the easing cycle of the RBNZ. The Bank cut rates to 2.75% on September 10 and issued a dovish statement which saw NZD weaken across the board. The NZD is expected to remain under pressure as the market anticipates at least one more cut this year. Westpac forecast NZDUSD at 0.59 by early 2016. GDP for Q2 missed estimates at 0.4%, however this is up from 0.2% growth in Q1.

CAD: The BOC left rates unchanged on September 9 and released a statement which was less dovish than the market had anticipated. This reduces the bearishness on the currency in the near-term however the price of WTI crude will largely dictate short term movements in the CAD.

JPY: The yen remains bearish medium term due to QQE. The BOJ have revised down their forecasts for CPI in coming years and their next move may include an adjustment to their inflation goal and stimulus program. CPI and BOJ inflation forecasts should be watched carefully for indications that the current stimulus will be increased. Thus far the BOJ maintains that the 2% target will be met by mid-16. Comments from Japan’s Yamamoto suggest further easing at the October 30 meeting. The BOJ kept monetary policy unchanged at the September 15 meeting and refrained from hinting at further easing. There remains some speculation that further easing may come at the October 30 meeting.

CHF: The franc is fundamentally a weaker currency given the SNB’s negative interest rates, however it can suddenly rally on safe-haven flows. The SNB regularly recite that the franc is overvalued and they are prepared to intervene to weaken the currency.

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