London Session: Central bank volatility a key FX risk
By Kathleen Brooks | February 20, 2013 1:02 AM EST
More and more central bankers are determining the near and medium term outlooks for currencies. Recently, the volatility in central bank speak has been remarkable. Take the Swedish Riksbank and the Reserve Bank of Australia; they both surprised the market by being less dovish than expected and failing to signal any near-term rate cuts in recent meetings and minutes.
The minutes from the latest RBA meeting was surprisingly upbeat, saying that since the January meeting global economic conditions had been a "little more positive", and downside risks had "abated somewhat". The minutes also noted the stabilisation in the Chinese economy, Australia's most important trading partner. They also said that monetary policy was accommodative and it would take some more time for the effects of previous rate cuts to work through the economy.
Interestingly, considering the RBA can be partial to talking about the damaging impact of a strong Aussie, they conveniently left any talk of AUD out of these minutes, which came hot on the heels of the G20. Likewise, the Riksbank, at their meeting last week, said the level of the SEK was fine even though there are some worrying aspects to the domestic economy, not least the persistently high unemployment rate, which remained at 8%.
Reading between the lines of central bank speak
When central banks and politicians have such control of the currency the job of the forex analyst is to read between the lines. So, are the RBA really moving to a neutral stance, or was this just a one-off to deflect attention from the G20? The RBA desperately wants a weaker currency to make Australian exports attractive and stretch out the mining boom a bit longer. Thus, once the G20 is firmly in the rear view mirror we could see the RBA change its tune, along with the Riksbank, due to fears about domestic demand.
Waiting for the new governor at the BOJ
The BOJ released the minutes from its meeting at the end of January this morning. This was not a major market moving event as the BOJ has had another meeting since January, so these minutes are old news. They did, however, highlight that the 2% inflation target is a long-term goal and may not lead to a rush to weaken the yen and boost prices. However, a new Governor will be on board in a few weeks, so the BOJ is in flux at the moment and there is still a lot of uncertainty about how aggressive the BOJ will be in future.
The yen has been the strongest performer along with the Aussie so far today. The yen was driven higher not by BOJ minutes, but by contradictory comments from the Prime Minister and the Finance Minister. Yesterday the PM said that the BOJ could buy foreign bonds (something that could ignite further ire from the other G20 nations), today that was denied by the finance minister. When politicians hold such a firm grip on the currency like the Japanese officials do, then one must expect volatility. USDJPY has dropped back from 94.20 highs of yesterday. Support lies at 93.50 then 92.80. If we get below 92.20 in the near term that would signal a much larger reversal in USDJPY, in our view. We tend to think that further strength in USDJPY over the medium-term will happen, but gains will take place at a more measured pace.
The BOE and Fed join the party on Wednesday
Tomorrow we get BOE and Fed minutes thrown into the mix, adding to the central bank risk pervading markets this week. The FOMC minutes will be scoured for clues as to the duration of QE3, but expected weak inflation pressure (CPI is due out later this week for January) is likely to keep the Fed fairly sanguine about the prospect of open-ended QE. The BOE may be more nuanced with some members sounding concerned about strong inflation. However, we doubt that rising fears over inflation will help the pound. GBP is fast becoming the funding currency of choice. After staging a fairly pathetic recovery this morning, GBPUSD run into selling pressure at 1.5510. 1.5440 is short term support; however, we tend to think that a move back to the 1.5260 lows from end of May is possible in the coming weeks.
German investors strike an upbeat tone
Elsewhere, the euro is also range bound even though the German ZEW was much stronger than expected. The forward looking index rose to 48.2 from 31.5 in January, which is the highest level since mid-2010. The focus now is on the flash PMI readings for the currency bloc that come out on Thursday. EURUSD had a knee jerk reaction higher on the back of the better than expected ZEW, but it soon fell back towards the bottom of its recent range at 1.330. We think this cross could trade in a 1.3280 - 1.3420 range in the coming days. Weak PMI data could push this cross below 1.3280 towards 1.3205, key uptrend support for the last 7 months. Below here signals sharper losses back towards 1.30 in the medium-term.
The fact German investors are more optimistic about the future could worry gold bugs. A brighter economic outlook combined with weak inflation pressures in the major economies could limit gold upside. We tend to think gold will be sold on any move higher towards $1,620-40, and we may see a decline to $1,580 - 50 in the medium-term.
One to Watch: EURUSD
Kathleen Brooks| Research Director UK EMEA | FOREX.com
23 College Hill | 3rd Floor | London EC4R 2RT
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan. Please read Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp).
Most Popular Slideshows
- Typhoon Rammasun Claims 18 Lives in China, Incurs $4.32B Losses (PHOTOS)
- Ellen DeGeneres Caught Cheating with Mutual Friend Before Portia de Rossi’s Rehab – Reports [PHOTOS]
- Selena Gomez Turns 22 Today, Celebrates Early without Justin Bieber: Top 12 Interesting Facts About the Singer [SEE PHOTOS]
- Photos from the Crash Site of Malaysia Airlines MH17 In Ukraine
Join the Conversation
- iPhone 6 2014 Release Date Very Soon as Apple Orders 120M New iPhones from Foxconn – Report
- Google Nexus 6 on Release Date Will Sport 2K Display Panel & Lower Price Tag – Report
- Motorola Moto G Vs. Xiaomi Mi3 – Low in Price, High -level Features
- FCC Approves Sony Xperia Z3 for U.S. Market
- Killer Xiaomi Mi4 at $369 Likely to Come With 5.0-Inch Display, Snapdragon 801 Processor, 3GB RAM and More
- End of Times Indicators: Japan’s Mount Fuji in ‘Critical State’ to Erupt, Could Affect At Least 1.2M People