USDJPY Hits 7 Week Highs, Big Week Ahead for Dollar
Daily FX Market Roundup October 28, 2019
Buckle your seat belts as it will be a busy week in the forex market. There are 3 central bank rate decisions, inflation reports, US non-farm payrolls, GDP, Chinese PMIs and a number of other market moving economic reports on the calendar. Monday was a quiet start but strong gains in stocks and corresponding rally in USD/JPY is a sign that investors are approaching the week with a positive attitude. This sentiment is driven by the European Union’s offer to extend the Brexit deadline by 3 months and President Trump’s comment that a China trade pact could be signed at the APEC meeting next month in Chile. Brexit and US-China trade tensions have been the two biggest risks for the global economy this year’s and while neither disappeared completely, today’s developments are a sign that they are moving in the right direction. With the S&P 500 hitting fresh record highs, investors are clearly pleased.
They are also encouraged by the prospect of a Federal Reserve rate cut later this week. Typically, interest rate reductions are preceded by weakness in the currency but USD/JPY hit a 7 week high today above 109. With Fed fund futures pricing in 90% chance of easing on Wednesday this move suggests that investors are looking at this week’s move as the Fed’s last. The last rate cut was not unanimous and chances are there will also be resistance to this week’s move as well. However, the slowdown in manufacturing and service sector activity along with the decline in inflation gives the doves the evidence they need to act. With that said, we still believe that USD/JPY should pull back ahead of the Fed’s monetary policy announcement and the 200-day simple moving average near 109.00 would be the perfect barrier to further gains.
Although the Bank of Canada and the Bank of Japan also have policy meetings, US data and the market’s appetite for dollars should dictate currency flows this week. Aside from FOMC, third quarter GDP and the October non-farm payrolls report are also scheduled for release. Coming hours before the Fed is expected to lower interest rates for the third time this year, GDP should have a greater impact on the dollar than NFP. Weaker consumer spending and trade activity suggests that growth will slow but the forecasts are fairly low with economists looking for GDP to ease to 1.5% from 2% in Q3.
Meanwhile the strongest currency today was sterling. Even though the UK Parliament rejected Prime Minister Johnson’s request for an early election, the market was pleased that the European Union offered the UK a 3 month extension that included an option to leave earlier. They also ruled out further negotiating over the withdrawal agreement, which is pretty the terms that Johnson was hoping for. The UK now has a clear path forward and while Johnson is pushing for another election after his December poll, the focus now should be on the impact of Brexit on the UK economy. In the near term we expect a relief rally in sterling but in the long run, the economy will suffer from Brexit.
It was no surprise that the weakest currencies today were the funding currencies, the Japanese Yen and Swiss Franc. However the New Zealand dollar also failed to benefit from the improvement in risk appetite. This is unusual because the improvement in US-China trade relations should benefit NZD. However the Reserve Bank of New Zealand is one of only two central banks still expected to lower rates this year and they will be the only ones left after the Fed eases on Wednesday.