July FOMC – Reason for Fed Optimism

Fed Rate Cut Federal Reserve forex blog Forex News Kathy Lien US Dollar US Economy

Taking a look at the day to day change in the U.S. dollar, it may seem that there was very little consistency in the performance of the greenback ahead of Wednesday’s monetary policy announcement. However if we isolate the price action to the U.S. session, the dollar moved higher against most of the major currencies. This morning’s U.S. economic reports were mostly better than expected with consumer confidence beating expectations and new home sales rising sharply. Service sector activity slowed according to Markit Economics and house prices dropped slightly but that was not enough to deter investors from buying dollars pre-FOMC. During a time when central banks around the world are actively talking about and planning for easing, the Federal Reserve’s hawkish bias will shine a bright light on the dollar. Many feared that the Fed would give up on the idea of tightening after Brexit but as we have seen U.S. markets and the U.S. economy have proven to be fairly resilient.

The following table shows more improvements than deterioration in the U.S. economy since the June Fed meeting. Retail sales increased, non-farm payrolls rebounded strongly with job growth rising 287k in June, the housing market is chugging along, manufacturing and service sector activity are on the rise. U.S. stocks also hit record highs while plunging U.S. yields provide support to the economy. The currency has strengthened across the board but the strongest gains were against the British pound. We’ve also heard from a number of FOMC voters since Brexit and they still seemed to support the idea of tightening. The FOMC statement generally reflects the views of the Fed leadership (Yellen, Fischer and Dudley) and it is likely to recognize the improvements in the economy since June. Of course, there will still be notes of caution and everything will be “data dependent” but we expect the main takeaway to be that a 2016 rate hike remains on the table. The Fed needs to move forward with policy normalization and they can’t wait around for the U.K. to invoke Article 50 which could take up to 2 years. So we expect the dollar to trade higher into and after FOMC. There won’t be fireworks but there could still be some quick trading opportunities.

FOMC_July2016

ECB – My Top 8 Takeaways

ECB euro forex blog Kathy Lien

Here are my Main Takeaways from the June ECB Announcement and Mario Draghi’s Press Conference -- will update if needed.

Top Takeaways from ECB

  1. ECB Hikes 2016 GDP and Inflation Forecasts
  2. More Stimulus on the way -- Corporate Bond Purchases Begin June 8, TLTRO Begins June 22
  3. ECB Expects Extra Impetus from Stimulus Yet to Hit
  4. Low Oil Prices are Helping but Q2 Growth May be Slower than Q1
  5. Not Seeing Significant Wage Pressures of Second Round Inflation Effects
  6. ECB Still in Wait and See Mode – Needs to See Full Impact of Stimulus, Maintains Dovish Bias
  7. BUT If Financial Conditions Tighten Significantly, they Stand Ready to Act
  8. Global Economy and Brexit Main Risks for EZ

Forex June Seasonality – Negative Dollar Bias

British Pound euro forex blog forex seasonality Japanese Yen Kathy Lien US Dollar

May was a very strong month for the U.S. dollar and that was no surprise to our readers because we shared this chart at the beginning of the month showing how well the dollar performs in May.  With last month’s gains, the positive seasonal bias continued for 7 straight years but on this first day of June, we are more interested in how seasonality affects currencies in the new month.

Which is why we updated our seasonality tables --

As you can see, there’s a negative bias for the Dollar Index in June.  After strong performance in May, profit taking tends to drive the greenback lower in June.  The seasonal trends are strongest for GBP/USD, EUR/USD and AUD/USD.  However the gains in general are relatively modest with the dollar giving back only part of the past month’s moves.

Seasonal trends are important but with the Federal Reserve poised to make a major decision in June and the U.K. holding a referendum on E.U. membership -- this year’s unique factors could easily overshadow seasonal trends. With that in mind, if the U.K. votes to remain in the European Union (and we think they will), the corresponding relief rally could drive the dollar lower against sterling and other high beta currencies.

June_Seasonality

RBA May Preview – Will they Cut Rates?

aud/usd Australian Dollar australian dollar forecast forex blog Kathy Lien Reserve Bank of Australia

The main focus tonight will be on Australia and the Reserve Bank’s monetary policy announcement. At their last meeting the RBA left rates unchanged and said, “Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.” Investors interpreted these comments to mean discomfort with the current level of the currency and sent AUD tumbling lower as a result. There’s a small subset of investors looking for the RBA to ease this month because CPI declined in the first quarter and activity slowed according to the PMIs. However according to the following table, consumer spending rebounded, business confidence improved, the unemployment rate declined and market indicators ticked upwards. So like many of their peers, the RBA may opt to wait and see how the economy performs in the next month before taking additional action.

rba_0516

RBA May Preview – Will they Cut Rates?

aud/usd Australian Dollar australian dollar forecast forex blog Kathy Lien Reserve Bank of Australia

The main focus tonight will be on Australia and the Reserve Bank’s monetary policy announcement. At their last meeting the RBA left rates unchanged and said, “Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.” Investors interpreted these comments to mean discomfort with the current level of the currency and sent AUD tumbling lower as a result. There’s a small subset of investors looking for the RBA to ease this month because CPI declined in the first quarter and activity slowed according to the PMIs. However according to the following table, consumer spending rebounded, business confidence improved, the unemployment rate declined and market indicators ticked upwards. So like many of their peers, the RBA may opt to wait and see how the economy performs in the next month before taking additional action.

rba_0516

Will the Bank of Japan Cut Rates Tonight?

forex blog Forex News Japanese Yen Kathy Lien

Over the past few trading days we have seen a very nice breakout in USD/JPY.  The move was driven entirely by expectations for this week’s Bank of Japan meeting. There are reports that the BoJ could introduce negative lending rates to complement negative deposit rates.

With the Japanese economy struggling under the weight of a strong Yen and slower global growth and speculators holding a record amount of long yen positions, the chance of easing by the BoJ is high. Take a look at how Japan’s economy changed since the March meeting in the table below.

The Japanese avoided intervening in the currency market when USD/JPY dipped below 108 because they prefer monetary intervention and their next opportunity to help the economy comes next week. With traders so aggressively short USD/JPY, this news could lead to more aggressive short covering ahead of and on the back of the BoJ rate decision.

boj0416

Will the Bank of Japan Cut Rates Tonight?

forex blog Forex News Japanese Yen Kathy Lien

Over the past few trading days we have seen a very nice breakout in USD/JPY.  The move was driven entirely by expectations for this week’s Bank of Japan meeting. There are reports that the BoJ could introduce negative lending rates to complement negative deposit rates.

With the Japanese economy struggling under the weight of a strong Yen and slower global growth and speculators holding a record amount of long yen positions, the chance of easing by the BoJ is high. Take a look at how Japan’s economy changed since the March meeting in the table below.

The Japanese avoided intervening in the currency market when USD/JPY dipped below 108 because they prefer monetary intervention and their next opportunity to help the economy comes next week. With traders so aggressively short USD/JPY, this news could lead to more aggressive short covering ahead of and on the back of the BoJ rate decision.

boj0416

How Far Will the RBNZ Go? April Meeting Preview

Kathy Lien

Investors are buying New Zealand dollars ahead of the Reserve Bank’s monetary policy decision. This demand suggests that traders don’t expect the RBNZ to signal any immediate plans to lower interest rates. Having just surprised the market with a rate cut last month, no additional easing is expected but when the Reserve Bank eased, they also warned that further stimulus may be required.  So the big question is whether this view will be emphasized in April.

The RBNZ’s primary concern last month was low inflation -- the central bank lowered their 2016 Q1 annual inflation outlook from 1.2% to 0.4% and their Q4 2016 annual inflation rate to 1.1% from 1.6%. They worried that prices would remain low for some time and that domestic risks would contribute to falling inflation expectations.

Thankfully consumer prices rebounded in the first quarter with the year over year rate ticking up to 0.4% from 0.1%. From an inflation perspective, the RBNZ has less to worry about but consumer spending, service and manufacturing activity weakened in the month of March, leaving the central bank with many areas of concern.

So while the RBNZ may not go as far as lowering rates in April, they could maintain their dovish bias, which would renew the decline in the New Zealand dollar.

Here’s a look at how New Zealand’s economy performed between the March and April meetings

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April FOMC Preview – 3 Scenarios for the Fed and Impact on Dollar

Fed rate hike Federal Reserve FOMC forex blog Kathy Lien US Economy

In 24 hours the Federal Reserve will announce its monetary policy decision and everyone expects interest rates will remain unchanged.  The Fed has done a great job of preparing the market for steady rates but no changes to monetary policy doesn’t mean  no volatility for the U.S. dollar.

The reason why the April FOMC meeting is important is because it will help to shape expectations for June.  There’s no monetary policy in May so if the Fed wanted to prepare the market for possible tightening, they would need to tweak this month’s FOMC statement. The problem is that the odds of a dollar positive and negative outcome is roughly balanced.  With the global markets stabilizing and commodity prices moving higher, the Fed has less to worry about internationally but domestically, growth has slowed. So even though no changes in monetary policy is expected at this month’s meeting, the greenback could still have a meaningful reaction to FOMC based upon the Fed’s assessment of the economy.

Now lets run through the possible scenarios:

Scenario 1 -- The FOMC statement remains virtually unchanged = Mildly negative for the dollar because it would imply an ongoing split within the Fed and reluctance to raise interest rates.

Scenario 2 -- Fed acknowledges deterioration in data and leaves out risk assessment = Dollar Bearish
The balance of risks statement was removed from the last 2 monetary policy statements because policymakers could not agree on the outlook for the economy. So if the risk statement is absent again, the dollar could spiral lower as the market interprets it to mean no rate hike in June.

Scenario 3 -- Fed acknowledges deterioration in data but describes it as transitory AND the risk statement returns = Dollar Bullish
If the risk statement reappears and the Fed describes the risks are balanced, the dollar will soar as the chance of a June hike increases significantly. Aside from the risk statement the central bank’s comments about recent data disappointments will also be important. If they say the deterioration is transitory, it will help the dollar.

The following table shows how the U.S. economy performed between March and April. An initial glance shows more deterioration than improvements with consumer spending, labor market activity, inflation, production and trade weakening. However there are glimmers of hope. The rally in U.S. stocks helped to boost consumer confidence as measured by the Conference Board’s report, consumer prices are still moving upwards as gas prices increased. New and pending home sales rebounded and most importantly manufacturing and service sector activity accelerated. With average hourly earnings on the rise, the Fed could argue that the economy will regain momentum in the near future and with prices rising, they need to get ahead of inflation expectations. In other words while the data suggests that the Fed should be less hawkish, they could also find reasons to stick to their plan of raising rates twice this year.

FOMC_0416

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ECB April Meeting Preview – What to Expect

ECB euro forex blog Kathy Lien

Thursday’s ECB meeting is one of the most important event risk this week.  EURO has been biding its time trading between 1.1235 and 1.1475 pre-ECB. Which end of this range breaks hinges upon Mario Draghi’s tone. If he’s concerned about the strong euro and talks about the possibility of more stimulus, then 1.1235 could give.  If he simply says they need more time to see the effects of stimulus and points to recent data improvements as a sign of their easing measures working, euro could break 1.1400 and aim for recent highs.

The following table shows how the eurozone economy changed since the ECB last met -- from a data perspective, the central bank has less to worry about in April vs. March when there was significantly more deterioration than improvement.  So the question is whether the 3 to 6 cent rise (depending where you’re measuring from) in EURO since easing rings alarm bells for the central bank.

 

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