YEN and EUR Strengthen as USD and AUD Weaken

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Figure 1: This chart displays the evolution of currency indices since the 25th of April.
Figure 1: This chart displays the evolution of currency indices since the 25th of April. © forexop

The Federal Reserve (USA) and the RBNZ (New Zealand) left their interest rates unchanged last week, as did the BoJ (Japan) which surprised and disappointed investors who were expecting more stimulus in the face of sluggish growth, falling inflation and a strong YEN that penalizes Japanese exporters. In contrast, the RBA (Australia) decided earlier this week to lower its main interest rate to 1.75%, a record low, to contain the appreciation of the AUD and fight deflationary risks.

The negative outlook for growth and inflation in the US appears to have postponed the next rates hike

Yen Bounce, NZD Holds Ground

The YEN, already strong, strengthened after the BoJ’s announcement. The USD weakened due to mixed macroeconomic data that seem to push the FED further away from a first rate hike in 2016, while the EUR strengthened and benefited from positive data, especially regarding its manufacturing sector.

Meanwhile, the NZD took advantage of the fact that the RBNZ hasn’t changed its monetary policy and the rebound in commodity prices at the beginning of last week. The AUD however is losing ground since worse than expected inflation was published last week. This increased the expectation for a reduction of the main interest rate, confirmed by the RBA this week: the cash rate was reduced by 25 basis points to 1.75%.

The top chart (Figure 1) tells the story. Each line represents the evolution of a currency against a basket of major currencies. Analyzing the forex market thanks to currency indices based on the negative correlation between them allow investors to better vizualise the big movements taking place on the market and to take advantage of them by focusing directly on the currency pair with the most potential.

Central banks have played a key role in the market and the evolution of the different currency pairs these last few weeks – the differences in monetary policies between countries represent an important driver in the evolution of the currencies. Indeed, the trends in the monetary policies of different countries are important for the exchange rate since it is this rate differential that is going to make a currency more (or less) profitable for investors.

The expectations of these changes in monetary policies (easing or tightening) allow for the anticipation of central bank decisions, which strongly influence the value of a country’s currency.

The BoJ’s inaction surprised investors and propels the Yen

According to Goldman Sachs, the BoJ made a “fateful” mistake last week, while Bank of America-Merrill Lynch believes it was the right call. Nevertheless, this decision has surprised investors and strengthened the JPY, which reached its highest level in 18 months against the dollar.

Since the beginning of the year, the YEN has gained 13% against the dollar. Mr Kuroda has put forward this week that the strength of the Japanese currency could negatively impact the economy, which is heavily dependent on exports. Officials said they were ready to expand monetary stimulus in the future to reach the inflation target of 2% (currently core-core CPI = 0.7%, annual change).

Figure 2: USDJPY daily chart
Figure 2: USDJPY daily chart © forexop

The negative outlook for growth and inflation in the US appears to have postponed the next rates hike

After the FED decided not to raise interest rates in April and rather mixed macroeconomic data, the announcement of the slowdown in the US manufacturing activity (ISM), weighed on the USD as investors foresee the possible degradation of the US economy with inflation still below the target of 2%. The EUR strengthened against the dollar, thanks to strong statistics regarding its manufacturing sector, and reached an eight-month high against the USD to 1.1614.

Nevertheless, several FED members spoke this week, confirming that June is still a “live meeting” like Denis Lockhart (President of the Federal Reserve Bank of Atlanta), which allowed the USD to rebound a little bit.

Figure 3: EURUSD daily chart
Figure 3: EURUSD daily chart © forexop

The RBA decision to lower its key rate to 1.75% made the AUD tumble

This decision’s main objective is to fight a deflation risk in Australia, which has been boosted by the unexpected slowdown in the consumer price index, which reached 1.3% last month. The RBA’s committee mentioned that their forecasts for inflation were lower than previously announced, which required an adjustment of their monetary policy. The AUD hit a five-week low against the USD. Lower commodity prices also weighed on the AUD, as well as on other commodity currencies such as the CAD or the NZD.

Figure 4: This chart is a performance chart displaying the evolution of currency pairs with the AUD since the 25th of April (starting point) – Frequency: 1h.
Figure 4: This chart is a performance chart displaying the evolution of currency pairs with the AUD since the 25th of April (starting point) – Frequency: 1h. © forexop
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About the Author

Carolane de Palmas After graduating with a Masters in Corporate Finance & Financial Markets and getting the AMF Certification (Financial Markets Regulator in France), Carolane went to market analysis software company (Highwave360) to take part in the European launch of their new market analysis software (stocks and currency pairs). She then become an independent trader, investing mostly in European and American stocks and indices (CFDs) using macroeconomic and technical analysis.

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