Last week, the Bank of Japan raised interest rates, The Bank of England cut and the Fed stayed pat! Bank of Japan Governor Ueda sounded quite hawkish in his conference stating “”If the economy and prices move in line with our projection, we will continue to raise interest rates. In fact, we haven’t changed much our projection from April. We don’t see 0.5% as any key barrier when raising rates.”
Friday’s US Non-Farm payrolls upset the apple cart! Only 114,000 new jobs were created versus expectations of 185,000 and the unemployment rate jumped from 4.1% to 4.3%. Equity markets took the brunt of it with the Nasdaq dropping 2.4%. This followed through into Asian markets with the Nikkei 225 getting pulverised (down 13.47%) and a concomitant buying of the Japanese yen which at 142 is more or less where we started the year. So much for central bank projections!
Expect markets to be volatile for the rest of the year as perhaps for the first time in a number of months, risk might be playing a part in market equilibrium as opposed to being ignored by it. Equity markets were due a correction and the yen was too. Carry trade unwinding is part and parcel of trading USDJPY. If things get too easy then complacency has a price to pay. It’s happened in just a few days. What happens next is bull versus bear, which creates volatility and opportunity. The Fed will very likely cut rates now in September which should encourage a flurry of cuts around the world. Save for Japan which I think may just keep rates on hold now until things settle down a bit.
To this week, and after all of last week’s excitement, we are in for a steadier week, data wise. ISM Services PMI is the pick for Monday, an RBA rate interest rate decision on Tuesday, and we have employment numbers from New Zealand and Canada. There is also a Reserve Bank of India interest rate decision on Thursday for those who trade NDFs.
US equity futures are pointing lower on Monday. ISM Services PMI may save the day. A positive print of 51 is expected for July vs 48.8 for June. Tuesday’s Reserve Bank of Australia interest rate decision is likely to remain unchanged at 4.35%. Quarterly inflation remains high (3.8%). Perhaps markets will spook the RBA into cutting, but I would suggest not. New Zealand employment figures out late Tuesday may have an impact on AUDNZD. Analysts are forecasting unemployment to rise to 4.7% in Q2 from 4.3%.
Economists are favouring an “unchanged” at 6.5% RBI decision on Thursday. At 84 USDINR is around its highs. Is a similar fate in store for the INR as to what’s just happened to the yen? If Indian interest rates stay at 6.5% and the Fed starts to cut does the INR carry trade (long INR short USD) gain more traction?
Friday, we start off with German inflation numbers (final) y.o.y for July. Consensus is for 2.3%. Canadian employment figures are released in the afternoon with expectations for the unemployment rate to remain at 6.4%.
Good Luck and Good trading!
Ben Robson is Head of Institutional E-FX at Swiss Finance Corporation. He is also the Amazon Best Selling Author of Currency Kings – How Billion traders Made their Fortune Trading Forex. McGraw Hill 2017
