By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
In the last 48 hours, risk aversion has swept through the foreign-exchange market sending all of the major currencies lower. USD/JPY was hardest hit with the pair extending its losses below 111. Although it traded as low as 110.73, it ended the NY trading session above the round number. USD/JPY still remains under pressure and if 111.00 is taken out in a more meaningful way, the next major support level will be 110. The big question is, will USD/JPY get there and if so, is it a buy or sell? Considering that there was no clear explanation for Tuesday’s JPY/USD breakdown and sell-off in global equities, it's hard to justify the move on a fundamental basis. There was some talk that the Trump administration could be in political trouble but we don’t think much will be made out of that. Investors were also concerned about Fed President Kashkari’s dovish comments, but his cautious views should not be a surprise considering that he was the only U.S. policymaker that voted to keep rates steady last week. We still believe that the comments from Yellen, Dudley and the other fed presidents due later this week will be more positive than negative for the dollar. They will most likely offer a less-dovish interpretation of last week’s FOMC rate decision by reminding everyone that U.S. rates are still headed higher. If that's the case, USD/JPY is a buy at 110. If they do not focus on the future direction of interest rates, then USD/JPY could break 110 and we would not be buyers until the market redirects its attention to Fed tightening. Wednesday morning’s U.S. existing home sales report fell -3.7%, which effectively erases the past month’s gain.
Meanwhile, the Reserve Bank of New Zealand left interest rates unchanged at 1.75% Wednesday afternoon. Although the central bank felt that the currency needs to fall further to balance growth and monetary policy needs to remain accommodative for a considerable period of time, it also sees inflation rising in the months ahead. RBNZ now believes that CPI will return to target in the medium term instead of gradually and believes that the weak Q4 GDP numbers were due in part to temporary factors. As a result, the central bank views the current growth outlook as positive. The RBNZ has grown less dovish at recent meetings and for this reason we believe that the New Zealand dollar should trickle higher after the monetary policy meeting. New Zealand trade data is scheduled for release on Thursday and the data could lend further support to the currency as the sharp rise in business confidence should translate into stronger trade activity. The Australian dollar also moved lower as leading indicators turned negative. The Canadian dollar, on the other hand, recovered its earlier losses as oil prices bounced off their lows.
Sterling's rally extended to 1.25 versus the U.S. dollar before profit taking took the currency pair below this key level. Data from the U.K. has been good and investors are looking to Thursday’s retail sales report to confirm the improvements. But a good number is not a given as wage growth slowed and while the British Retail Consortium reported a smaller decline in shop prices and spending, both figures remained negative. GBP has had a nice run but with the U.K. poised to trigger Article 50 in the next 10 days, formalizing the country’s divorce with the European Union, further gains may be limited. If retail sales miss, it would be the perfect catalyst for a reversal in GBP/USD. As for EUR/USD, it weaved above and below 1.08. The currency is being supported by Macron’s strong performance during this week’s debates. He continues to gain traction in the polls, which should keep the currency supported ahead of Friday’s PMI reports.