The major currencies traded without clear direction in pre-European trade in Asia following a bout of dollar gains after Fed chairwoman Yellen left the possibility of a rate hike on the table. She remarked in a speech late yesterday that "most FOMC participants, including myself, currently anticipate .... an increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter," though she took care to leave plenty of wiggle room in her message. Her comments saw EUR-USD dip by over 50 pips to the mid-1.11s, where the pair has since remained. USD-JPY also nudged higher, peaking at 120.38 so far, well up from yesterday's low at 119.22. Japanese inflation data revealed the expected dip back into deflation territory, with core CPI falling to -0.1% y/y, which is the first negative print in two-and-a-half years. Stock markets in Asia have been mixed, and most Asian and commodity currencies have been steady.
[EUR, USD]
EUR-USD flopped back under the 1.1200 level after Fed chairwoman Yellen said that a rate hike by the end of the year remains a possibility. We remain bearish of EUR-USD, as the debate about when the Fed will hit the rate lift-off button has shifted to FOMC meetings in October and December as possible launchpads. We also expect the ECB to counter any euro strength with volleys of dovish rhetoric and even a possible expansion in its QE program. The 'VWorrying' situation in Europe's car manufacturing sector is also threatening to growth in the region over the near-to-medium term.
[USD, JPY]
USD-JPY flipped back above 120.00, a level that has been a central point to trade over the last month. The latest phase higher was inspired by hawkish-leaning remarks from Fed boss Yellen, while Japanese inflation data revealed the expected dip back into deflation territory. Core CPI dipped to -0.1% y/y. While weaker oil and commodity prices are the principal culprits for the first negative inflation print in two-and-a-half years, stagnant wages and sluggish economic performance are also at play, and the data will fuel market expectations for the BoJ to announce a further increase in its QQE program as soon as its Oct-30 policy meeting. USD-JPY resistance is marked at 120.54-66 (which markets recent daily highs), ahead of 120.91 (the 200-day moving average).
[GBP, USD]
Sterling has underperformed notably this week, declining by nearly 3% against the dollar from week-ago highs and by over 1.5% versus the euro. The pound has been under the cosh since the September CBI industrial trends survey unexpectedly dropped to a -7 reading, and data showed government borrowing rising more than expected in August, with tax revenues down. The data adds to a growing list of signs pointing to a moderation in economic activity. Other recent soft data include the August PMI surveys and retail sales figures. BoE's Cunliffe said on Monday that while UK growth was "pretty robust," price pressures were absent and concerns about the China economy have been rising. Cable's Sep-4 low at 1.5164 is the next downside focal point.
[USD, CHF]
EUR-CHF has reinstalled itself in the mid-1.09s after logging a three-week low at 1.0823 on Tuesday. ECB's Draghi didn't produce the dovish sound-bites that many had expected at his testimony before the European parliament on Wednesday, while the Swiss economy minister Schneider-Ammann said, also on Wednesday, that "we travel in the direction of purchasing power parity," and that "his journey is not yet finished, as purchasing power remains significantly above 1.20 Swiss francs per euro." The SNB's announcement of unchanged policy last week, and renewal of its pledge to intervene in the currency market if needed, had little impact. The central bank continues to class the franc as being "significantly overvalued," though it has had some success in undermining the franc's status as a safe haven, with deeply negative deposit rates having caused a steady drip feed of yield-searching Swiss fund outflows. The franc is trading some 6% lower than levels seen a couple of months ago.
[USD, CAD]
USD-CAD has settled back to the low-to-mid 1.33s after logging an 11-year peak at 1.3416 on Thursday. Uncertainty about the global growth outlook have returned pressure onto the Canadian dollar, which is more exposed to global conditions than the U.S. economy via its relative dependence on oil prices. As for the U.S. dollar, the debate about when the Fed will hit the rate lift-off button has shifted to FOMC meetings in October and December as possible launchpads.
