G10 FX Weekly – Still positive on the USD

by: Roy Teo

  • US dollar recovers after FOMC meeting
  • NZD and CAD stage a relief recovery
  • BoJ, BoE and RBA to keep monetary policy unchanged next week





US dollar: a weak start …

Earlier this week, soft equity markets in China resulted in safe haven flows into the Japanese yen. The yen rose to almost 123 against the US dollar (USD) as a result. Better than expected business confidence in Germany also supported the euro to above 1.11. Sterling gained after economic growth in the second quarter recovered after a slowdown in the beginning of this year. Surprisingly weak US consumer confidence data also weighed on the USD.


… but recovers after FOMC

However the USD recovered after the FOMC upgraded its assessment of the labor market and hinted that a rate hike this year was getting closer. Short term yields in the US firmed which supported the USD. In our view, the next two labour market reports (7 August and 4 September) should show that nonfarm payrolls continuing to rise comfortably about the 200k mark with unemployment rate trending lower. Hence we expect the FOMC to raise its target range for the fed funds rate by 25bps to 0.25-0.5% on 18 September. As this is not fully priced in by financial markets, we maintain our view that the USD strength will persist in the coming months.


CHF, SEK and AUD weaker

The Swedish Krona (SEK) weakened as both retail sales and consumer confidence were weaker than expected. However, the SEK firmed on Thursday on strong Q2 GDP numbers. The Swiss franc (CHF) also underperformed as risk sentiment in financial markets improved. The SNB intervention in the currency market to weaken the CHF has continued as total sight deposits in the Swiss National Bank (SNB) rose. Expectations that the Reserve Bank of Australia (RBA) will ease monetary policy in the coming months weighed on the Australian dollar (AUD) despite a recovery in iron ore prices.


NZD and CAD relief recovery

There was a relief recovery in both the Canadian (CAD) and New Zealand (NZD) dollars in the past week. The CAD was supported as oil prices stabilized, while the NZD recovered after the Reserve Bank of New Zealand (RBNZ) Governor Wheeler was less dovish on the economy’s outlook. He stated that though further monetary policy easing is likely, aggressive rate cuts over the coming months would only be warranted if the economy looked to be moving into recession. Looking ahead, we expect the RBNZ to lower the Official Cash Rate (OCR) by 25bp to 2.75% in September.


Central banks to keep monetary policy unchanged for now

Next week, we expect central banks in the UK, Japan and Australia to keep monetary policy unchanged. We expect the Bank of England to raise interest rates by 25bp later this year in November. On the other hand, we expect the RBA to cut the OCR by 25bp as soon as September. The Bank of Japan is also likely to increase monetary stimulus, probably early next year, as it becomes evident that inflation is unlikely to reach the 2% target in the first half of fiscal year 2016.