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Forex Today - All eyes on the Boj and the sniff of a change, but Euro still key to the USD outlook

Market Analysis /
Greg McKenna / 31 Jul 2018

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day. 

As ever, feedback welcome....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog. 

And, for a deeper dive into more currencies and the charts please see my daily markets video.

QUICK SUMMARY

The US dollar is weaker. The DXY has lost 0.33% to 94.36 with the Euro gaining a similar amount to regain 1.1700 – German and Spanish inflation prints helped a little as did the move higher in Bund rates. The weight of USD longs could be the enemy of its bull market for a little while.

Anyway, the Pound lifted 0.2% to 1.3129 despite news the UK government is readying plans for the no deal Brexit. Mark Carney in a Bloomberg interview did suggest that rates will rise this week however. USDJPY was flat at 111.04 as we await the BoJ today.

On the commodity bloc there was much divergence. The Kiwi is up half a percent and looking more and more likely to retest and maybe bust 0.6850 resistance, the CAD is 0.15% stronger with USDCAD at 1.3030 while the Aussie has underperformed with a 0.04% game but reclaimed the 74 cent region it lost yesterday – it’s at 0.7405. CNH and CNY are largely unchanged day on day at 6.8272 and 6.8102. 

 

BIGGER PICTURE

It’s a big day for USDJPY traders today as we await the announcement from the BoJ.

After retail sales yesterday were much better than expected with a lift of 1.5% you have to wonder if the BoJ might make some sort of change given the economy does seem to be healing and the BoJ is running into constraints on the effective execution of its policy.

But will there be any policy changes, any indications that the bank is readying to alter the anchor rate for 10-year bonds, and ETF purchases? Most likely is the later with expectations that the BoJ will switch from Nikkei buying to Topix buying. But there is also an expectation that the bank will downgrade the inflation outlook after an extended period of undershooting it.

That’s despite signs that the economy is looking in better shape and that wages are rising.

So the wash up is it’s probably too early for a material change in BoJ policy with regard to bonds. That’s certainly the case given the BoJ was in buying 10 year JGB’s for the third time in a week yesterday and actually got hit with a decent – at least much larger – amount of bonds than previous operations.

Thus, it would be a surprise if there is a surprise given kites have been flown and market reaction tested. But governor Kuroda has been want to give traders a heart start from time to time. So we’ll all be watching very closely.  

Here's how I'm seeing USDJPY longer term. 

Click on me, I'll expand
Click on me, I'll expand

We’ll also be watching the Euro closely as it closes in on this resistance zone once again. Of course, in reality, it’s just in a wedge inside of a 1.15-1.1850 range right now. But if either 1.1590 or 1.1750 breaks we’ll likely get at least a 1 cent move based on my read of the charts. EU GDP and CPI reports will be huge tonight in the context of the proximity of the resistance zone and given the Fed announcement this week. 

Click on me, I'll expand
Click on me, I'll expand

DATA:

Here at home today it's private sector credit and building approvals.  But it's a big day in Asia and Europe. 

The global manufacturing canary – South Korea – releases business confidence, construction output, industrial and manufacturing production, along with retail sales. We get Japanese industrial production and unemployment this morning before the BoJ this afternoon and of course, we get the NBS China PMI’s for manufacturing and services.

Retail sales are out in Germany, Euro area inflation for July and GDP for Q2. Canada releases its monthly GDP (yeah I know) as well as PPI and in the United States we get very important employment costs, PCE prices, Personal income, and spending data as well as the Chicago PMI and Case Shiller housing.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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