- USD bulls don’t require patience
- DXY has room on the downside
- BoJ scales back on inflation
- RBA opens up both barrels
It’s no real surprise to see that major currency pairs keep to tight trading ranges ahead of tomorrow’s Federal Open Market Committee outcome. The calls on whether or not U.S. policy members will vote to keep the word “patient” in the Federal Reserve’s monetary policy statement is not a foregone conclusion. Dollar longs will be in for a rude awakening if the Fed maintains its “patient” stance. Though leaving it in would come as a surprise, there is a credible risk of policymakers doing just that.
U.S. economic releases have not managed to post much glory throughout the first quarter, apart from jobs, which remain consistently robust and now hail an economy touting full employment. Core personal consumption expenditures have trended lower since October, while average hourly earnings peaked two months ago in January and have been trading lower ever since. Last week’s third consecutive monthly decline in U.S. retail sales data and yesterday’s softer-than-expected industrial production numbers, despite weather-related explanations, does not necessarily justify a sense of urgency for the Fed to change market dynamics just yet. And then there is U.S. multinationals that will point to the strength of the mighty U.S. dollar for affecting their earnings reports this quarter.
What If the Fed Disappoints?
Market positioning for the USD remains stretched on the long side, and tomorrow’s event risk is that those with longs may panic to get out if Fed Chair Janet Yellen decides that “patience” is needed. Technical analysts have been arguing that the dollar index spot exchange rate (99.63) happens to show a serious rally over the past 12 months, but with very few profit-taking dips seen as the pair approaches massive resistance near 102. In other words, if Yellen gives a bearish cue, there will be plenty of room for the most dominant of currencies to fall with gusto (92 and then 89).
It’s neither impossible nor impractical for the Fed to maintain the status quo. Nevertheless, it’s reason enough for some short-EUR/USD speculators to trade cautiously ahead of the Fed statement, concerned rates may be held lower for longer. The slight narrowing of U.S. Treasury to bund spreads has been influencing some speculators to pare their EUR/USD (€1.0600) shorts. The two-year spread has narrowed just -6 basis points from the trend wide — it’s still +50 basis points from October. Expect traders to focus on market corrections while the techies remain very bearish.
The BoJ and RBA Have Their Say
The significance of tomorrow’s Fed decision is clearly highlighted by the market’s minimal involvement in the overnight’s two event risk announcements. Last night, the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) made their respective statements.
The BoJ’s policy statement was largely a reiteration of the previous month, maintaining annual rate of monetary base increase at +¥80 trillion, and reiterating economic assessment of their economy continuing “moderate” recovery trend. Board member Takahide Kiuchi remained the lone dissenter in favor of a more protracted timeframe for inflation target (8-1).
Faced with plunging energy prices, Governor Haruhiko Kuroda and company last October took the lead among a number of global central banks in easing credit to stamp out deflation concerns and shore up Japan’s weakening economy. The only change in the statement related to inflation was the BoJ scaled back its current consumer-price index view to +0.0-0.5% from around +0.5%, and that the outlook for inflation to be around +0% versus the prior “slow for time being.” The BoJ remains a long way off its ambitious target of achieving +2% inflation in two years. Expect the BoJ to continue to periodically remind the market that it will not hesitate to take further action if it’s deemed necessary.
USD/JPY has since only fallen slightly below ¥121.30 on the release with little indication that further policy easing may be in the works for April.
RBA Remains on the Easing Path
The AUD has not managed to stay trading lower (A$0.7619), especially after last night’s RBA’s board minutes paved the way for potential additional easing after this month’s surprise rate hold. The market was anticipating a second consecutive rate cut. The support for the AUD has more to do with U.S. dollar longs being prudent and lightening up their positions against the major pairs ahead of any surprise announcements by the Fed tomorrow.
The RBA minutes suggested a new cut may become appropriate. Australia’s economy is operating with spare capacity, and non-mining investment is subdued for longer-than-expected. The meeting minutes noted the risks of a property market bubble but policymakers preferred to allow the markets to digest the February rate cut before moving again.
RBA Requires Two Barrels: Currency and OCR
The RBA minutes were a tad more ardent about the need for a lower AUD than an OCR (overnight cash rate) statement. Nevertheless, there were a number of key takeaways the market has noted:
- Board thinks a lower AUD would help; OCR statement is also likely to be needed.
- RBA is fortuitous that “dormant” inflation provides the scope to embrace both outcomes.
- Unless AUD data surprises to the topside further cuts are in the pipeline.
- Fixed Income is pricing a +35% chance of an April cut. The forex market will be expected to be net sellers of the AUD.
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