RBNZ Cuts, Don’t Worry About USD/JPY

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

  • USDJPY – US Retail Sales Next, Don’t Worry about Yen Comments
  • NZD Crashes after RBNZ Cuts 25bp
  • AUD Reverses Ahead of AU Employment
  • CAD Extends Gains on Higher Oil Prices
  • GBP Soars Despite Mixed Data
  • EUR Bounces: Light Greek News Flow

NZD Crashes after RBNZ Cuts 25bp

The big focus on Wednesday was the New Zealand dollar, which crashed after the Reserve Bank cut interest rates for the first time since March 2011. The 25bp reduction took interest rates down to 3.25% and according to the central bank, further easing may be needed if data is weak. The currency is overvalued and they believe that a significant downward adjustment in the New Zealand dollar is justified. Even though they accelerated their timeline for reaching their inflation target from Q3 of 2017 to Q4 of 2016 and lifted their 2016 inflation forecast, the GDP forecast for next year was cut sharply from 3.8% to 3.3%. The problem is clearly growth and if that does not pick up, the central bank may have to cut again. Wednesday’s announcement is significant for NZD because it marks the beginning of what could turn into a more prolonged easing cycle and desynchronization of monetary policy should not only drive NZD/USD below 70 cents but take it lower against many other major currencies. Meanwhile the Australian and Canadian dollars also traded sharply higher. The strength of the AUD is surprising considering that consumer confidence declined and more importantly, RBA Governor Stevens said they are open to further easing and believe that the exchange rate needs to fall further. We know that the central bank is happy with a currency value of 75 cents and not 77 cents. Australian employment numbers were scheduled for release Wednesday evening and expectations for a strong jobs number gave support to the currency. Of course, the U.S. dollar also weakened across the board and gold prices rose. The Canadian dollar hit 1.22 on the back of rising oil prices. Aside from the Australian employment report, Chinese retail sales and industrial production numbers were also scheduled for release Wednesday evening.

USDJPY – US Retail Sales Next, Don’t Worry about Yen Comments

The biggest story in the currency market Wednesday was the slide in USD/JPY, which was the largest one-day decline this year. The weakness drove all of the Yen crosses lower with EUR/JPY losing close to 1% and NZD/JPY falling more than 2.4%. The sell-off was triggered by comments from Bank of Japan Governor Kuroda who said “it’s hard to see the yen’s real effective rate falling further.” The Japanese Yen has fallen significantly over the past 10 months. It dropped more than 14% against the U.S. dollar, 17% against the Swiss franc and over 8% versus the British pound. This month, the Japanese yen hit its weakest level versus the dollar in 13 years. Given these moves, its not a surprise for the Bank of Japan to be satisfied with the yen’s decline. However Kuroda’s comments have no real bearing on monetary policy. We know that there will be no increase to Quantitative Easing this year because the economy is performing well and inflation is on the rise. At the same time, they are in no position to unwind QE because inflation remains very low. Back in April, the BoJ pushed back the timing of achieving its 2% inflation target by 6 months. As an export-dependent economy experiencing a slow rise in inflation, the Japanese government is also in no position to intervene in its currency. In fact, the MoF/BoJ have almost always intervened to sell the yen and not buy it. So while they may be satisfied with the yen’s decline and don’t see it falling much further, there’s nothing that they can or will do in the medium term to drive the currency higher. We don’t think anyone should be worried about Wednesday’s comments and instead we have initiated a fresh USD/JPY long position on the 122 handle. It also won’t be long before traders forget about Kuroda’s comments. U.S. retail sales are scheduled for release Thursday and a strong rebound is expected. While expectations are high, auto sales have been strong, wages increased and job growth accelerated. After taking a breather in April, consumers are expected to return in force. A strong report would validate the market’s expectations for liftoff and revive the rally in the dollar ahead of next week’s FOMC meeting. Even if retail sales fall short and unless the print is very weak (below 0.5% growth), the case is still there for tightening, making any pullback in the dollar short-lived.

GBP Soars Despite Mixed Data

The British pound traded sharply higher against the U.S. dollar Wednesday ahead of Bank of England Governor Carney’s comments. The break of 1.55 intraday triggered stops that took the currency pair to 1.5554. U.K. data was mixed with industrial production rising 0.4% and manufacturing production falling -0.4%. Unfortunately at the time of publication, Carney did not touch on the economy and monetary policy. Ian McCafferty is slated to speak Thursday and his comments are likely to drive sterling even higher. It is believed that McCafferty is very close to voting for a rate hike even though the policy committee as a whole will most likely keep rates unchanged for the rest of the year.

EUR Bounces: Light Greek News Flow

The euro ended the day higher against the U.S. dollar. On an intraday basis, the currency pair traded as high as 1.1385 but the gains fizzled. News flow on Greece was light. One moment there’s talk that progress is being made and the next either Greece or their creditors reject the proposals. Until everyone is speaking the same language and the Germans also indicate that they are close to a deal, we remain skeptical. As for data, French industrial production was much weaker than expected, falling -0.9% against a 0.4% forecast. With no major Eurozone economic reports scheduled for release Thursday, the outlook for EUR/USD hinges on the outcome of the U.S. retail sales report. The May high of 1.1467 is near-term resistance in the currency pair and 1.1050 is support. If EUR/USD drops below 1.12, it should drift back down to this level.

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