With the FOMC minutes now made public, the Bank of Japan policy announcement and ongoing deliberations to revive struggling economies throughout Europe and Asia deserve attention as well.
The Japanese yen (JPY) is trading higher ahead of the Bank of Japan (BoJ) monetary policy announcement. While the central bank may be relieved to see volatility in Japanese government bonds (JGBs) and the Nikkei settle, recent economic reports should provide some cause for concern.
We saw a dip in consumer confidence figures, which followed a similar pullback in the eco watchers survey this week, along with a smaller current account surplus and larger trade deficit. The International Monetary Fund (IMF), along with many economists, believe that the momentum in Japan's economy will increase in the coming months, but so far, we have seen as much deterioration as improvement.
In terms of positive developments, after falling 20% between May and June, the Nikkei recovered approximately 14%. JGB yields have also stabilized after spiking to a high of 0.923% in late May.
As such, the Bank of Japan is widely expected to leave monetary policy unchanged Wednesday night, but the window for additional action remains open. Let’s not forget that Japan's central bank is in the midst of an aggressive $1.4 trillion stimulus program, which means easy money will keep flowing into the economy.
In other words, we don't expect the BoJ rate decision to pose any major threat to the yen.
In conjunction with the rate decision, BoJ Governor Haruhiko Kuroda will hold a press conference. The last time we heard from the central bank head, he was optimistic about the outlook for the economy. His decision to stand down in the face of bond market volatility suggests that he is a firm believer in “Abenomics” and its ability to keep Japan's recovery on track.
Without the hope for additional stimulus, USDJPY may have a tough time extending to new highs.
EUR/USD Down Move Seems Imminent
The euro (EUR) rebounded against the US dollar (USD) on Wednesday despite more weak economic data from the Eurozone. French industrial production dropped 0.4% in May, while manufacturing production fell 0.8%, and the country's current account deficit widened to -4.1 billion from -2.8 billion.
These numbers are just as ugly as the reports from Germany earlier this week. While bond yields edged higher and European stocks remain virtually unchanged, the deterioration in economic data should not be ignored by investors.
The European Central Bank (ECB) has made it clear that it is ready to increase stimulus if growth in the region slows further. We are beginning to see evidence of that very scenario, and while it is still early and the data is from May and now dated, we are watching carefully to see if the situation worsens. If more economic reports surprise to the downside, the ECB could start preparing the market for another rate cut or a new LTRO program.
So far, the EURUSD continues to hold above its key support level of 1.2746. However, we feel that it is only a matter of time before that support is broken, paving the way for a stronger move down to 1.25.
The Case for More RBA Easing Grows
The Australian dollar (AUD) and New Zealand dollar (NZD) ended Wednesday unchanged against the greenback despite some very disturbing Chinese economic reports. While the trade surplus increased from $20.42B to $27.12B, exports and imports both plunged in the month of June. Economists had been looking for growth on both fronts, but exports instead dropped by the largest amount since November 2009, while imports fell by the largest margin since February.
These declines reflect weaker demand domestically and abroad, which is a dangerous mix for not only China's economy, but the broader global economy. The AUD did not have a significant reaction at the onset, mostly because iron ore prices increased and the currency is already deeply oversold, but with time, higher iron ore prices could weaken Chinese demand for the commodity even further.
In addition to the Chinese trade numbers, consumer confidence in Australia also dropped 0.1%, and at this stage, the case for another rate hike from the Reserve Bank of Australia (RBA) is growing.
Australian employment numbers are scheduled for release Wednesday evening, and based on the PMI data, there should be a small increase, although a much larger rise is needed to stem the slide in the AUD.
Meanwhile, the Canadian dollar (CAD) traded higher for the third day in a row thanks to rising oil prices. In the past two-and-a-half weeks, the price of oil has surged more than 12%, from $93 a barrel to a one-year high just shy of $106 a barrel today.
2 Key UK Policymakers Speaking on Thursday
With no major UK economic data released on Wednesday, the British pound (GBP) traded higher against the US dollar and remained steady against the euro.
It may be a quiet week for UK data, but new Bank of England (BoE) Governor Mark Carney's dovish monetary policy bias has been making it difficult for sterling to rally.
No UK data is expected on Thursday, either, but Monetary Policy Committee member David Miles will be speaking in London, while Chancellor of the Exchequer George Osborne is scheduled is testify before lawmakers regarding 2015-16 spending plans.
Miles has consistently voted for additional bond purchases since November of last year, so his comments are likely to be dovish. Osborne, on the other hand, has already outlined his plans to cut spending by GBP11.5 billion in the 2015-16 fiscal year. Many sectors will face painful spending cuts, but we don't expect anything new to be revealed in his testimony to lawmakers, so this should be a non-event for the pound.
By Kathy Lien of BK Asset Management