• It was very quiet start to the week on currency markets. The USD has put in a mixed performance, weakening JPY, but mildly strengthening against the AUD, GBP and NZD.  However, global equity markets are lower, and U.S. ten-year bond yields have declined towards a sixteen-month low of 1.61%.  Fears over Brexit, low inflation, declining equity markets, ECB quantitative easing, and a slowing in growth have added to the weight on global bond yields.
  • Of the four central bank meetings this week, the BoJ is the most likely to surprise.  There is a small chance that BoJ will be announcing more easing this week.  A surprise easing would see USD/JPY spike, but this move should not last given the structural support from Japan’s current account surplus and fragile risk sentiment. No change by the BoJ and a dovish FOMC would see USD/JPY continue to push lower.
  • No policy change is expected by the FOMC.  While we think the “dot plot” should continue to imply two 25bp hikes in 2016, we anticipate downward adjustments to the longer-term projections. This, combined with a less rosy assessment of the U.S. labour market, should weigh on the USD, in our opinion.
USDJPY daily chart 14 June 2016
USD/JPY Daily Chart

USD Outlook

USD will this week take guidance from the language in the FOMC statement. The FOMC should continue to stress future rate moves remain data dependent. While we think the “dot plot” will continue to imply two 25bp hikes in 2016, we anticipate downward adjustments to the longer-term projections. This, combined with a less rosy assessment of the U.S. labour market should weigh on the USD. However, underlying Brexit concerns and a possible surprise BoJ policy easing may provide an offset.

Technical analysis: Technically, the USDJPY has just touched the support level at around 105.65 and it should have a rebound up, at least for short term.

GBP Outlook

GBP should remain heavy as concerns about the 23 June EU referendum outcome build.  The momentum in the opinion polls has recently been behind the “leave” vote.  This has increased the risk premia on GBP-denominated assets.  The BoE meeting minutes (Thursday) and speech by Governor Carney (Thursday) may once again stress the economic risks posed by a Brexit.  The UK CPI (Tuesday), labour (Wednesday) and retail sales (Thursday) data should generate intra-day GBP vol., but the data remains a secondary consideration relative to the looming event risk.

Technical analysis: Given the importance of the upcoming event , I think any technical analysis might be not worth it – the market will be mainly driven by news and speculations.

AUDUSD 14 June 2016
AUD/USD Daily Chart

AUD Outlook

AUD/USD continues to be supported by the well-performing Australian economy, the modest recovery in global commodity prices and sluggish USD. AUD is currently trading modestly above its Friday New York close.  In the hours after the U.S. FOMC decision, the May Australian labour force data and speech by income RBA Governor Lowe are the main Australian highlights. We anticipate vol. in AUD/USD will spike on Thursday, regardless. However, if the BoJ will actually ease, it will create a USD bid in the market and expected to weaken AUD/USD.

Technical analysis: Expect the down move to continue in short term but with some support around 0.7300 level.

AUD/JPY will take direction from Thursday’s FOMC meeting and the Bank of Japan’s monetary policy meeting. Both central banks make their policy decisions within 12 hours of each other.  In our view, every BoJ meeting is live until they announce more policy easing because core inflation has clearly peaked and the significant strengthening in the Japanese TWI has tightened Japanese financial conditions.  We judge a less than 50% chance the BoJ announces more policy easing this week.  Policy easing could take the policy interest rate further negative from ‑0.1% to -0.3%.  Alternatively, the BoJ could increase its asset purchases from the existing rate of ¥80 trillion per year to ¥90-100 trillion per year.

A surprise decision to ease would see AUD/JPY and USD/JPY spike up, but we do not think this move would last given the structural JPY support generated by Japan’s current account surplus (4% of GDP) and fragile market risk sentiment.  No change by the BoJ and a dovish FOMC would see USD/JPY continue to push lower.

NZD Outlook

NZD/USD strength is being driven by a relatively high New Zealand terms of trade, a well-performing New Zealand economy (the unemployment rate continues to trend lower), high New Zealand real interest rates, and strong structural demand for New Zealand assets.  New Zealand’s Q1 GDP is released this week (Wednesday).  Both we and consensus anticipate 0.5% (QoQ) growth, with annual growth accelerating to 2.6%.  The data is released a few hours after the US FOMC decision.  As such, volatility in NZD will be high and increase if the GDP outcome is significantly different to the RBNZ’s expectation of 0.6% (QoQ).