USD broadly weakens with the exception of the CAD and MXN
GBP surges after hawkish comments from Carney
JPY strengthens against most majors ahead of a BoJ announcement tommorow
USD – The US dollar weakened broadly against most major currencies with the exception of the CAD and MXN as the dollar index slid 0.35% amid a drop in the S&P and DJIA of -1.22% and -1.14%, respectively. Global stock markets have also lost ground, pushing investors to seek out safe-haven currencies generating some support for the USD and much more towards the JPY. Despite slipping against most currencies, the dollar found additional support from Federal Reserve policymaker Charles Evans' comments that the central bank will probably scale back bond buying later this year. Evans said the US central bank would keep short-term interest rates near zero until unemployment falls below 6.5%, which he expects could happen in mid-2015. However, we would also add that an inflation rate above the Fed’s 2% target will be needed in order to trigger an increase to short-term rates. Looking forward, Fed policymakers, who last week voted to continue the central bank's $85 billion monthly bond-buying program, will next gather to discuss policy on Sept 17 and 18.
EUR – The euro traded slightly higher against the US dollar as Europe's financial markets prepare for a volatile September when both the German election and a key US central bank meeting will take place. Just days after the Fed makes its highly anticipated policy announcement, which may present plans to scale back its monetary stimulus, Germans will go to the polls and vote for their new government. Although Angela Merkel is expected to remain chancellor, some uncertainty leading up to the vote has frozen European Union decision-making. During this time, investors are eager to find out whether the government will take a more or less accommodative approach towards the troubled Eurozone countries.
GBP – The pound surged 1.1% vs. the dollar today despite a BoE announcement during its Quarterly Inflation Report that implied the central bank will plan to keep interest rates low for the next three years. In its statements, the BoE introduced a 7% unemployment threshold before increasing the nation’s interest rate. Based on analyst forecasts, unemployment in the UK is not expected to reach such levels until the third quarter of 2016. However, governor Mark Carney has also stated that if inflation remains above 2.5% for the next 18-24 months, the unemployment guidance could be “knocked out,” potentially prompting rate changes regardless of the unemployment rate. With inflation currently at 2.9%, well-above the 2.5% target, many traders feel as though this inflation provision could signal an earlier exit to the BoE’s monetary easing policies. Other possible “knockouts” not specifically tied to inflation were also mentioned, adding even more opt-out conditions to the BoE’s new unemployment linked guidance and fueling bullish sentiment for the sterling.
JPY – The yen strengthened against the dollar on expectations that Japanese investors would convert their overseas earnings before the mid-August Obon holiday. The yen, which is sought after as a safe-haven currency, made broad-based gains against major currencies as the Japanese stock market sank 4%. The JPY is also trading stronger before the BoJ announces its policy decision tomorrow amid bets it will refrain from adding to stimulus that has helped weaken the currency 11% this year.
Commodity Currencies – The Canadian dollar weakened against the greenback on talk of the US Fed scaling back its stimulus program as early as next month. As such, the loonie pushed above C$1.04 on the interbank market for the first time since mid-July. Also weighing on commodity linked currencies was the falling price of gold that reached three-week lows along with the drop in Brent oil that slipped below $108. However, the AUD came in slightly higher, but remained capped below a key psychological level of .90 cents on the heels of the RBA’s announcement to cut its overnight rate to 2.5% as expected. For now, the market will look towards any further clues the RBA will announce another rate cut this year, which could add weight on the currency. The kiwi followed its counterpart and pushed higher, but remained capped below the key psychological level of .8000. Look for the kiwi to potentially retest .8100.
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