Originally published by AxiTrader
QUICK SUMMARY
The US dollar is a little stronger in index terms this morning sitting at 94.49. That's mostly on the back of the post-BoJ surge in USD/JPY (and a little risk appetite perhaps) – it’s at 111.87, up 0.7%. The euro is largely flat at 1.1690, as is the pound at 1.3120. Both are off their highs for the night though of 1.1745 and 1.3172 respectively. So, the US dollar hasn’t had a bad night.
On the commodity bloc the rally in copper and base metals more broadly, the lift in basic materials stocks, and a generally more positive tone has helped the Aussie dollar hold yesterday’s post-building approvals gains. AUD/USD is at 0.7430, off a high of 0.7440. Kiwi is 0.6810 after mildly weaker than forecast employment data this morning. It's down 0.2%. USD/CAD has fallen 0.20% after the Canadian economy recorded stronger GDP growth than expected in May data released overnight showed. USD/CAD is at 1.3003.
BIGGER PICTURE
Bear with me folks, it's high horse time.
What exactly was QQE – the BoJ’s plan to buy unlimited amounts of 10-year to keep them anchored at 0% - if it wasn’t EXPLICIT forward guidance? AM I wrong?
So, as I tweeted yesterday afternoon, "I read the #BoJ's new "Strengthening the Framework for Continuous Powerful Monetary Easing" doc & get a real sense they're looking for the exit...eventually but confused…"Forward guidance" plus letting 10's move "upward & downwards to some extent" plus downgraded GDP :S”.
Indeed they are confused after years of missing their inflation target but materially impacting the market transmission mechanisms of stocks, bonds, and currency levels and rates.
But I do sense a move toward the exit. That’s something Shuli Ren said in a Bloomberg article yesterday titled, “The Bank of Japan Has Found Some Cover for Tapering”. Ren said, “When a central bank feels the need to tell the world that its monetary policy is “continuous” and “powerful,” you know investors will conclude that it’s neither”.
I couldn’t agree more, though many have said this is QE to infinity. So I might have the wrong end of the stick on this.
Ren focuses on the tweaks and is spot on saying (my bolding), “what’s “around zero percent” anyway? Is 0.2 percent around zero? How about 0.49 percent? If US rates rise sharply, this is Kuroda’s easy way to be in sync with the rest of the world…The 10-year government yield dropped 5 basis points on Tuesday, the most since June 2016, to 0.05 percent, as earlier media reports of a major policy shakeup proved incorrect. Don’t be surprised, however, if Japan’s bond yields soar with the US, because now the BOJ has the policy flexibility to let them”.
That didn’t matter to yen buyers though. Because the bet is that this is QE to infinity with the yen losing 0.6% as USD/JPY rose to 111.73 this morning while the US dollar was flat against the euro and pound. Maybe some of that was risk appetite because the Swissie underperformed too. But the important thing is that USD/JPY is trying to climb back above the 3year trend line. Let’s see where it ends the week after the Fed and non-farms.
Elsewhere the strength of US data and weakness of euro GDP did little other than constrain the euro rally.
EU GDP decelerated to 0.3% in Q2. Zero point three percent – awful. But inflation was reported as 2.1% for July so even though growth is not strong the ECB will be on track to end QE this year and may even start thinking about hiking earlier than is currently forecast. That will help the euro a little.
Indeed you can in this chart of the EU 2yr govie forward 2 years that if this relationship has any bearing on the EUR/USD direction euro could rally. Of course, the market is not short euro like it is many other pairs so the impetus for a drive higher as shorts cover is not as strong. But if euro can best 1.1730/50 resistance it can rally.
Bring on the FED
DATA:
On the day today we get New Zealand employment and labour costs this morning and then it being the start of the month we get the raft of manufacturing PMI’s across the globe. Here in Australia we get the AiGroup’s version. Also, out is an RBI decision on interest rates. Tonight, it’s the ISM in the US I’ll be watching closely along with where Europe is at and then tomorrow morning at 4am my time the Fed will do nothing the market is betting.
Have a great day's trading.