Yen weakness may remain the largest driver of Dollar Index moves through the foreseeable future—particularly as FX Options markets predict significant moves out of JPY currency pairs. In fact, our sentiment-based trading strategies remain aggressively short the Japanese Yen against the Euro, US Dollar, Australian Dollar, British Pound, and Swiss Franc.
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Limited US and Japanese economic event risk makes UK and Chinese market news the most significant in the coming 24 hours, and UK and Chinese economic data will in particular serve as guide to the Dollar’s performance versus the British Pound, the Japanese Yen, and Australian Dollar.
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To that end, UK NIESR Gross Domestic Product reports are not typically top market movers, but the fact that the British Pound has been the second-worst year-to-date performer against the Greenback increases the significance of any single piece of data. It will be important to watch whether the NIESR GDP estimate for March shows considerable improvement; December through February prints each showed economic contraction—making a triple-dip recession increasingly likely. We could see a relief rally if UK growth saw significant improvement in the month of March.
On the Asian front, China’s Consumer and Producer Price Index figures will be key drivers to the Australian dollar and, to a lesser extent, the Japanese Yen. The close economic relationship of Australia with China has moved a strategic step forward as two countries reached a new deal today to allow each other’s currencies to be directly converted.
Australia becomes the only third country to have this arrangement after the US and Japan. The direct exchange-rate regime will bring a lot of advantages on reducing costs to Australian companies which are doing business in China, Australia’s largest trading partner. It may also reduce the demand of the US dollar held by Chinese and Australian firms, as the greenback is no longer needed as the intermediation currency for trades—boosting the AUDUSD and hurting the Dollar Index.
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To that end we’ll watch CPI and PPI inflation numbers as a gauge on the likelihood of shifts in monetary policy from the People’s Bank of China. Any considerably above-forecast prints would suggest that the PBoC is more likely to restrict policy in a bid to slow inflation in the world’s second-largest economy. Given Australia’s clear dependence on Chinese consumption, expect to see Australian Dollar weakness and Dollar Index strength.
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Written by David Rodriguez, Quantitative Strategist and Renee Mu, DailyFX Research Team