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- US Dollar Retraces Gains, Japanese Yen Up as Risk Appetite Remains on Edge
- British Pound Tumbles Amidst Speculation BOE Will Expand UK Quantitative Easing Program
- Canadian Dollar to Face Ivey PMI on Tuesday
- Swiss Franc Remains Range-Bound vs. Euro, SNB Intervention Risk Looms
Australian Dollar Rebounds Ahead of Key Reserve Bank of Australian (RBA) Rate Decision
The Australian dollar staged a solid comeback through the second half of the US trading session as the currency retraced most, if not all, of its losses from the European trading session against the US dollar and Japanese yen. The volatile moves in the classic FX carry trade pairs were correlated with what we saw in the US stock markets, as the DJIA and S&P 500 fell sharply in the morning, only to end the day in positive territory. The rally in the Australian dollar also comes ahead of the Reserve Bank of Australia's next rate decision.
The RBA is anticipated to leave their cash rate target unchanged at 00:30 ET on Tuesday for the third straight month at 3.00 percent, but the Australian dollar may only respond to a surprise rate cut or a biased monetary policy statement. As it stands, Credit Suisse Overnight Index Swaps (OIS) are only pricing in a 10 percent chance of a 25 basis point reduction. After the central bank's last meeting, RBA Governor Glenn Stevens said that future rate cuts would be based on how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity. As a result, it will be important to look to Bollard's statement, as signs that the economy or financial markets are not holding up to the RBA's liking may suggest that the central bank will consider cutting the cash rate target again, and this news could weigh on the Australian dollar. On the other hand, indications of a broadly neutral bias, such as comments suggesting that 3.00 percent is essentially the floor for the cash rate target, could support the currency.
Related Article: Australian Dollar Weekly Trading Forecast
US Dollar Retraces Gains, Japanese Yen Up as Risk Appetite Remains on Edge
The US dollar and Japanese yen were quite strong at the start of the US trading session as risk aversion drove FX carry trades and equities lower. However, a bounce in stocks that pushed the DJIA and S&P 500 into positive territory by the market close led the US dollar to give up nearly all of its gains, while the Japanese yen also pulled back but still ended Monday as one of the strongest major currencies.
The day was actually quiet from a fundamental perspective, with only one important indicator hitting the wires. US ISM non-manufacturing was released at 10:00 ET and the index rose more than anticipated to 47.0 in June from 44.0, with a breakdown of the report showing that business activity, prices paid, new orders, employment, and new export orders all surged. That said, the headline ISM index held below 50 - the point of neutrality for the index - for the ninth straight month, signaling a continued contraction, though at a slower pace. Also, the only key components to break into expansionary territory (above 50) were prices paid and new export orders, suggesting that domestic demand is not close to being a driver for recovery at this point.
British Pound Tumbles Amidst Speculation BOE Will Expand UK Quantitative Easing Program
The British pound was the weakest of the majors on Monday despite the fact there were no economic releases on hand. Nevertheless, speculation is rising that the Bank of England may announce that they plan on expanding their quantitative easing program on Thursday after last week's final reading of Q1 GDP for the UK was unexpectedly revised down to an annual rate of -4.9 percent, the lowest since recordkeeping began in 1956.
Looking ahead to Tuesday, output by industrial producers in the UK is forecasted to have risen for the second straight month in May at a rate of 0.2 percent, which may help to push the annual rate of growth up to -11.3 percent from -12.3 percent. Other measures of activity in the sector, such as manufacturing PMI, have risen steadily between March and June, but since the index has held below 50 since May 2008, the results simply suggest that the contraction in the sector has slowed, rather than abated completely. As a result, there are some downside risks for this upcoming release of industrial production, and a surprise month-over-month decline could weigh on the British pound upon release.
Related Article: British Pound, Australian Dollar to See Rate Decisions Next Week
Canadian Dollar to Face Ivey PMI on Tuesday
The Canadian dollar ended Monday on a mixed note, and the currency could see heavy volatility on Tuesday morning as the June reading of the Canadian Ivey Purchasing Managers' Index (PMI) is projected to rise to 50.5 from 48.4. Since 50 is the point of neutrality for this index, such a result would indicate that business activity expanded during the month, albeit very slightly. However, only a sharper-than-expected increase or surprise decline may have an impact on price action for the Canadian dollar, but overall, there's little evidence to suggest that PMI will rose significantly, leaving downside risks open for the Canadian dollar.
Related Article: Canadian Dollar Weekly Trading Forecast
Swiss Franc Remains Range-Bound vs. Euro, SNB Intervention Risk Looms
The Swiss franc made headway against the euro on Monday, keeping EUR/CHF within an intraday falling channel formation, with support now at 1.5150 and resistance at 1.5235. This pair is important to watch as the Swiss National Bank (SNB) has cited the appreciation of the Swiss franc against the euro as a risk for deflation, and has physically intervened in the currency markets within the past two weeks. Also, last Thursday, SNB directorate member Thomas Jordan said that they continue to consider interventions to prevent an excessive rise in the Swiss franc. As a result, traders should beware that the further EUR/CHF falls, the greater the potential for intervention grows.
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Written by: Terri Belkas, Currency Strategist for DailyFX.com