FX Arena Heating Up
The FX arena is becoming exceedingly nervous with the victory of the Tories in the UK, the potential additional stimulus from Japan and the big question mark on interest rates that looms in the US. This week, an already anguished FX market could heat up even further with several high-profile market moving events set for release in Japan, the UK and the US. These notable events will make the FX market very interesting to watch but will also make for very choppy trade. Just how will those market movers swing your alpha? The answer to that question is what we set out to discover this week.
Yen to Crumble?
On the Asian front, the Yen is expected to attract a lot of interest and activity amid two major releases; first, Japan’s GDP for Q1 2015 is due to be released on Tuesday and then on Friday, the BOJ is set to release its monetary policy decision. After rumors swirled that Japan’s Prime Minister, Shinzo Abe, is said to be counting on Japan to “outgrow” the US and for inflation to hit 2%, the pressure will be mounting on the BOJ to make it happen. If, after the first quarter GDP release, it becomes clear that Japan’s economy is once again experiencing “just muddling through” growth, then as the time for the BOJ rate decision approaches investors will begin shifting their expectations towards more BOJ stimulus and thus a weaker Yen. Of course, the real Yen mover will only be ignited once the BOJ officially declares its decision. Even if BOJ Governor Kuroda only hints at further easing and doesn’t explicitly announce it, investors can presume that the heavy Yen selling that has accompanied us since 2012 will resume.
Sterling: Higher or Lower?
The Pound Sterling undoubtedly has been dominating the FX market over the past two weeks. After the Tories won a landslide victory which dispelled fears of a hung Parliament an aggressive Sterling buying spree was ignited. However, even as investors were busy piling in on Sterling long bets, the Bank of England has “chilled” its enthusiasm with lowered growth forecasts and expectations of a rate hike pushed back to 2016. With this week’s CPI data release, as well as the Bank of England’s meeting minutes and retail sales figures, investors will get the chance to make their own assessment. Is the BoE right to be pessimistic? If the data comes across as upbeat then investors might just ignore the dovish speech by Governor Mark Carney and return to their love affair with the Sterling – that is at least until something else looms.
Is the Fed more Dovish?
While data from Japan and the UK is clearly important, the FOMC meeting minutes, the protocol from the latest Fed meeting, will certainly dominate markets across the globe. After the Fed was seen tilting slightly to the dovish side, given lower inflation and lower growth, investors will want to see just how dovish the Fed really is and how temporary the downside pressure on the economy. If, in its protocol, the Fed continues to stress that the pressure is transient and that the FOMC’s expectations of a bounce back in Q2 remain firm, then Dollar bulls might begin to comeback. However, this time around, investors will also use the CPI data that follows on Friday as one more piece to complete the puzzle of the next interest rate hike. If US inflation does show signs of reheating and crawling back higher, the Dollar could really stage a comeback. However, if the minutes reveal a downbeat Fed, then the softness in the Dollar that has prevailed over the past few weeks will likely remain in place a little longer.
Down to Business
Overall, most volatility is expected around the Yen and Dollar, with Sterling ranking third in potential volatility. With the FOMC meeting minutes dominating sentiment to a large extent, anything other than protocol which reveals a Fed that foresees only a slight soft patch in the economy could soften the Dollar, relative primarily to currencies such as Sterling and also the Euro. However, if the Fed does deliver and expresses its belief that the recent soft patch was merely transient, then it will be difficult for either the Sterling, the Yen or the Euro to continue and gain ground vs the greenback.
On the Plate
RBA Meeting Minutes(Tuesday) – After the RBA has cut interest rates, investors will keen to read through the RBA protocol. If the protocol reflects a high likelihood of more rate cuts further down the road the Aussie could slide. If the protocol generates the notion that no more rate cuts are coming, the Aussie could gain.
UK CPI(Tuesday) – If UK inflation moves back above zero and Core CPI(Excludes food and energy) above 1% it could favor the sterling.
Eurozone CPI(Tuesday) – Low inflation rates are in the Eurozone are at the core of the Euro’s weakness. Hence any gain in inflation from the past month would have a positive effect and favor the Euro.
Japanese GDP(Tuesday) – The GDP will dominate sentiment of the JPY just ahead of upcoming Friday rate decision. If GDP growth accelerates above 1.5% YoY it will be considered a beat and support the Yen until Friday. If not , investors might brace for Yen weakness ahead of Friday.
BoE Minutes (Wednesday) – If the BoE protocol reveals a rather dovish BoE the Sterling could weaken ahead of data.
FOMC Minutes(Wednesday) – The main event of the week. If the FOMC protocol reveals a dovish Fed the dollar could face further weakness.
BoJ Rate Decision(Friday) – The market mover for the Yen. If the BoJ hints at more stimulus the Yen could tumble.
German GDP(Friday)- If German GDP accelerates above 1.1% YoY the Euro could gain ground against its peers.
US CPI(Friday) – If inflation in the US heats up and the Fed proves to be less dovish than expect at the Wednesday release then the dollar could make a comeback.
Chart of the Week – EURUSD