Market Drivers July 29, 2015

RBNZ Wheeler says kiwi could depreciate more
EZ GFK Consumer climate unchanged, UK data better
Nikkei -0.13% Europe 0.39%
Oil $47/bbl
Gold $1095/oz.

Europe and Asia:
EUR GFK Consumer 10.1 vs. 10.1
GBP UK Mortgage Approvals 67K vs. 66K

North America:
USD Pending Homes 10:00

USD FOMC Statement 14:00

It’s been a quiet night of range trading in the currency market with most participants happy to stand down ahead of the FOMC statement due later today at 1800 GMT.

In early Asian session trade the kiwi saw some turbulence in the wake of comments by RBNZ chief Graeme Wheeler who once again stated that further depreciation of the currency is required. The kiwi dipped then rose in aftermath of his comments as traders reacted to the idea that RBNZ may not necessarily lower rates just yet, but as the European session dragged on the kiwi gave up its gains to trade near the lows of the day.

The pair has been completely beaten down by the shorts as the steady decline in commodity price and the slowdown in China have exerted its toll on the unit. However, for now the kiwi appears to have found support at the .6500 level and is in the process of carving out a near term bottom. Barring any further slide in commodity prices the NZD/USD may stabilize here and may even stage a short covering rally especially if the Fed signals no action in September.

The key question for the currency market is September or December? There is little doubt that the Fed wants to normalize rates this year. The only question is when. The economic data is providing mixed clues which is the primary reason that the market appears uncertain. On the one hand the labor conditions continue to improve with jobless claims reaching their lowest levels in decades. On the other hand wage growth remains tepid at best and inflationary pressures are contained and will likely decline due to the recent sharp drop in energy prices. Finally, the disturbing decline in consumer confidence especially in light of lower gasoline and buoyant labor demand must surely give Fed pause and could delay any action until end of the year.

While no one is expecting any policy change today the markets will scour the statement for any change in tone. Right now the OIS market is pricing only a 40% chance of a hike in September while fully 80% of economists expect the Fed to move next month. We suspect that the OIS may be closer to the truth and that the Fed is unlikely to signal any tilt towards hawkishness at today’s meeting.

USD/JPY has remained steady at 123.50 for most of the night but the pair could see some good two way action post FOMC release. If the Fed sticks to the status quo leaving the language unchanged the pair could dip to 123.00 on mild disappointment by the bulls. However, if the Fed surprises by hinting that September rate hike may be coming despite the lack of inflation pressure and the dour consumer sentiment, the USD/JPY could really take off and start to challenge the recent swing highs at 125.00

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