The US payroll figure last Friday really put a thorn in the FOMC’s side. Most of the Fed members have been very hawkish in recent weeks, culminating with Janet’s commentary that the data is good and we expect to raise rates twice this year. That is now unlikely to happen, not even one rise is likely. The bond Market had large gains with interest rates heading back to recent lows and the US dollar followed suit with a large sell off. You can expect this weakness in rates and Greenbacks to continue in the short to mid-term. There was never going to be a rate rise in the US, the Fed were just talking up their book with the data not supportive of any rise. Jobs has been trending lower for months and inflation is stubbornly stuck at 1.1%. Continue to look for shorting opportunities.
To leave or not to leave?
Across the Atlantic, the UK is bouncing from one Brexit Poll to the next, with recent gains made by the “leave” camp. The data coming out of Britain is also mixed to weak and most of this is due to the uncertainty of where the UK will be at the end of the month. That said, once the referendum is out of the way, I see the pound gaining strength as it is at the bottom of the cycle. If they remain in the Euro it should gain immediately. If they leave the strength maybe some months in coming as they adjust to the new scenario. On the fence for the pound, waiting until the referendum is down, volatility too high.
Eurozone is still a basket case and the ECB will remain where it is for some time yet. With flat inflation of 0.1%, even the large QE and zero rate policy in place cannot budge it, I do not see any major growth from Euro on the horizon. German Bunds however, are a popular safe haven asset and any sell off in higher risk assets (ie Stocks) sees gains in this market, and hence the Eurodollar by default. Net short euros but keep watch for stock weakness as this will ruin any short trades.
Commodity currencies have been struggling throughout May, but the Loonie (Canada) and Aussie are well positioned both economically and politically to take advantage of any global growth. With large exposure to the two largest economies (Canada to US and China, Australia to China) their currencies are undervalued at current levels. Australia is weaker though, thanks primarily to the head of the RBA having misread things and knee-jerking rates lower off a single bad number. Inflation in Australia is weak, however the country has turned and picking up pace elsewhere and outside of the mining industry. Having the country’s leading economist lowering rates and threatening more, undermines corporate and consumer confidence. The sooner we see him gone (Sep this year) the better! The Kiwi has performed very well recently, but it is a one trick pony over there and whilst dairy prices remain strong the Currency is overvalued and rates are way overpriced in comparison to similar economies. I expect them to lower rates this week and would be a seller of any rallies in NZD. Bullish both CAD and AUD, buy any dips.
NIRP does not work, but we will go deeper
Japan has tried everything for 30 years to get inflation going and the latest version (Abenomics) by Abe and Kuroda has failed again. They flip flop between policies and fail to follow through on stated concepts. A total mess but the Yen is strengthening because of this. Add to that, the JGB’s are the most loved safe haven assets of all, so when stocks fall, the yen rallies. I expect the BOJ will force deeper NIRP (negative interest rate policy) to try and get some momentum in inflation and weaken the yen, but until then I would remain long yen.
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