By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- NZD: RBNZ Cuts 25bp
- USD/CAD Soars to 6-Year Highs
- AUD Hit by Dovish RBA
- Euro Dips As Markets Await Greek Parliament Vote
- Dollar Snaps Back on Stronger US Data
- GBP: Look for Further Gains in Sterling
Big Moves in CAD and NZD
The biggest moves in Wednesday's foreign-exchange market continue to be in the commodity currencies. Both the New Zealand and Canadian dollars experienced sharp losses intraday but NZD recovered after RBNZ. The Reserve Bank of New Zealand cut interest rates by 25bp for the second time in a row due to softening economic outlook and inflation. The recent decline in commodity prices hit New Zealand's economy hard and the central bank fears that this will lead to slower growth. While the Reserve Bank said further easing seems likely and a further NZD drop is necessary, they dropped the reference to NZD levels being unjustified and their comment about more easing at some point suggests that it wont happen at the next meeting. NZD jumped on these changes but we believe their bias to ease again should cap gains in the currency. The bounce in NZD/USD indicates that investors fully priced in the move. Meanwhile USD/CAD broke above 1.30 for the first time in 6 years. A sharp rise in oil inventories drove oil prices down another 1.5%. While the price of crude is holding $50, investors fear that the recent decline will lead to further weakness in Canadian data. Retail sales are scheduled for release on Thursday and a softer report is needed for the currency pair to rise above 1.3064 to hit a 10-year high. The Australian dollar also ended the day lower after some initial post-CPI volatility. Consumer prices grew 0.7% in the second quarter, which was slightly weaker than anticipated but year over year, the CPI-trimmed mean and weighted average beat expectations. AUD rallied initially but weakened just as quickly. RBA Governor Glenn Stevens also spoke overnight and while he said monetary policy is about right at the moment, he also added that further rate cuts is on the table.
Euro Dips As Markets Await Greek Parliament Vote
At the end of the North American trading session, we were still waiting for the Greek Parliament to take a vote on a second round of bailout measures. While they are widely expected to approve these measures after passing the first round of austerity last week, euro traders are disappointed that Greek officials are dragging their heels once again. According to lawmakers, a decision should be made by 3am local time. When the official announcement is made, we expect the EUR/USD to trade higher in relief and then the real talks begin. There are reports that the ECB extended another lifeline to Greece Wednesday by raising its ceiling for emergency funds by 900 million euros. The cash infusion into Greek banks would come ahead of ECB, IMF and Eurogroup teams arriving in Athens for fresh negotiations. While Greek banks are open, capital controls remain in place. We are looking for EUR/USD to rise after the Greek Parliament approves the second round of reforms but the rally should be short lived as the Germans and Greeks bump heads over debt relief.
Dollar Snaps Back on Stronger US Data
On Tuesday we discussed how the 1% decline in the dollar was driven by profit taking and on Wednesday, the dollar came back. With new home sales rising more than expected, investors resumed their purchases of U.S. dollars. The greenback traded higher against all of the major currencies with the exception of the British pound. The 3.2% increase in existing home sales, rise in house prices and uptick in mortgage applications reinforces our view that the economy can absorb between one and two rate hikes this year. We are still hoping that USD/JPY will retrace further toward 123.00, giving us the opportunity to buy at a lower level ahead of next week's FOMC rate decision. Although the Fed is not expected to raise interest rates in July, the tone of the monetary policy statement should drive the dollar higher. Between Thursday's jobless claims and leading index -- coupled with Friday's new home sales report -- we could see a further pullback in USD/JPY, especially since 124.50 is proving to be an important resistance level.
GBP: Look for Further Gains in Sterling
The British pound traded higher after the central bank released the minutes from its last monetary policy meeting and is poised for further gains. While the decision to keep policy unchanged was unanimous, the minutes noted that, "For a number of members, the balance of risks to medium-term inflation relative to the 2% target was becoming more skewed to the upside at the current level of Bank Rate. For these members, the uncertainty caused by recent developments in Greece was a very material factor in their decisions: absent that uncertainty, the decision between holding Bank Rate at its current level versus a small increase was becoming more finely balanced." This indicates that at the next monetary policy meeting, more than 1 member of the central bank could vote in favor of a rate rise. These hawkish MPC minutes have been extremely positive for sterling and we believe that Thursday's retail sales report will only encourage further gains. With wages on the rise, discretionary spending should increase. The best way to express our bullish outlook for the GBP is through GBP/JPY as the Fed's and the BoE's tightening bias should drive the currency pair back to its June highs.