Market Movers: Unmasking the Forces Behind Currency Shifts
Monday, September 30, 2024 (Week 40)
Welcome to analysis, focusing on USDJPY, AUDUSD, and EURUSD. The dominant theme across markets this past week has been central bank policy divergence and its impact on currency valuations. The Federal Reserve's dovish pivot, coupled with expectations of further easing, weighed on the USD. Conversely, other central banks like the RBA and BOJ maintained more hawkish stances, supporting their respective currencies. Economic data releases, including US inflation and employment figures, influenced market sentiment and currency fluctuations. Geopolitical tensions, particularly in the Middle East, also played a role in driving safe-haven flows. Let's dive into the specifics for each currency pair.
USDJPY: Yen Strength Amid BOJ-Fed Divergence
USDJPY actively traded by retail traders, institutional investors, and corporations. Liquidity high due to Japan's role in trade. Relationship with intermarkets influenced by risk sentiment and interest rate differentials.
The dominant market theme for USDJPY has been the divergence in monetary policy between the Federal Reserve and the Bank of Japan. The Fed's dovish pivot, marked by a 50 bps rate cut on September 18th and expectations of further easing, weighed heavily on the USD. This dovish tilt was reinforced by softer-than-expected US economic data, including the Core PCE and PCE price indexes coming in below forecasts on September 27th. Despite strong Q2 GDP growth, the market focused on the easing inflation narrative.
Conversely, the BOJ maintained a more hawkish stance, with Governor Ueda suggesting further rate hikes are possible depending on inflation. This policy divergence, combined with safe-haven flows into the JPY amid escalating Middle East tensions, strengthened the yen.
The yen strengthened sharply following Ishiba's victory in the leadership election on September 27th, pushing USDJPY down to 142.2. This reversal underscores the market's sensitivity to Japanese political developments.
Several factors could drive USDJPY higher in the upcoming week. A stronger-than-expected US economic data release, challenging the soft-landing narrative, could boost the USD. Escalating geopolitical tensions could trigger safe-haven flows into the USD, further supporting the pair. Conviction: Moderate. However, the dominant theme of Fed-BOJ policy divergence is likely to persist throughout the month, potentially limiting significant USDJPY appreciation.
Conversely, USDJPY could fall if upcoming US data confirms the soft-landing narrative and reinforces expectations of further Fed easing. Any indication from the BOJ of a potential rate hike could also strengthen the yen, adding downward pressure on the pair. Conviction: High. This bearish momentum is likely to persist in the upcoming month, given the underlying macroeconomic factors.
AUDUSD: Aussie Dollar Supported by RBA Hawkishness
The AUDUSD pair, often dubbed the "Aussie," attracts a broad spectrum of traders, drawn by its liquidity and link to commodity markets. Australia's substantial iron ore and coal exports influence the currency's value, making it sensitive to commodity price swings.
For AUDUSD, the interplay between RBA policy and commodity prices has taken centre stage. While the RBA held rates steady at 4.35% in September, Governor Bullock maintained a hawkish stance, emphasising the need to curb inflation. This contrasted with the Fed's dovish pivot, supporting the AUD.
Despite economic growth concerns in China, Australia’s major trading partner, recent gains in iron ore and coal prices and strong employment data bolstered the AUDUSD pair.
Several catalysts could drive the Aussie higher in the upcoming week. Continued strength in commodity prices, driven by supply disruptions or increased demand, could support the AUD. If the upcoming Australian GDP data surpasses expectations, it could reinforce the RBA's hawkish stance and further boost the AUD. Conviction: High. This bullish momentum is likely to persist in the upcoming month, given the favourable macroeconomic backdrop.
Conversely, a sharper-than-expected slowdown in the Chinese economy, or a decline in commodity prices, could put downward pressure on AUDUSD. Any indication from the RBA of a potential shift towards a more dovish stance could also weaken the Aussie. Conviction: Low. However, the RBA's current hawkishness suggests that any sustained AUDUSD decline is unlikely in the upcoming month.
EURUSD: Euro's Fate Hinges on ECB Policy
The EURUSD pair, the most actively traded currency pair globally, sees high liquidity driven by extensive trade and investment flows between the Eurozone and the US. Its relationship with intermarkets is complex, reflecting economic growth differentials, interest rate expectations, and risk sentiment.
EURUSD's trajectory has been primarily influenced by the evolving ECB policy outlook and concerns about the Eurozone economy. While slowing inflation fueled expectations of an ECB rate cut, the bank’s cautious approach has kept the Euro relatively stable against the USD. Weaker-than-expected PMI figures and continued contraction in Germany's manufacturing sector have dampened optimism and added to uncertainty about the Eurozone's growth trajectory.
A decisive shift in ECB policy towards easing could weaken the Euro in the upcoming week. If forthcoming Eurozone economic data continues to disappoint, it could further reinforce the narrative of a struggling economy and exert downward pressure on the EURUSD pair. Conviction: Moderate. However, a potential rebound in the Eurozone economy could support the Euro and limit its decline in the upcoming month.
On the other hand, EURUSD could appreciate if the upcoming US economic data underperforms, leading to a weaker dollar. Any sign of a turnaround in the Eurozone economy, or a more hawkish-than-expected ECB stance, could also bolster the Euro. Conviction: Low. However, without a significant change in the dominant market narrative, any sustained EURUSD rally is unlikely in the upcoming month.
Conclusion
The overarching themes of central bank divergence and economic uncertainty are likely to persist in the upcoming week. The Federal Reserve's dovish stance and the possibility of further easing will continue to exert downward pressure on the USD. Conversely, central banks like the RBA and BOJ are expected to maintain more hawkish positions, providing support to their currencies. Upcoming economic data releases, including inflation and employment figures, will play a crucial role in shaping market sentiment and determining currency movements. Geopolitical developments, especially in the Middle East, will also influence safe-haven flows and contribute to market volatility.
Key Takeaways:
USD weakness: The Fed's dovish pivot remains the dominant theme, suggesting the USD's decline could continue in the short term.
Data dependence: Upcoming economic data releases will be critical in confirming or challenging the soft-landing narrative for the US economy.
Geopolitical risks: Monitor geopolitical tensions, particularly in the Middle East, as they could introduce further volatility and drive safe-haven flows.
Sources
Sources used for this report include: Australian Bureau of Statistics, Australian Government, Bank of Canada, Bank of England, Bank of Japan, BRC - British Retail Consortium, Bureau of Economic Analysis (BEA), Cabinet Office (Japan), Canada Mortgage and Housing Corporation, Centre for European Economic Research (ZEW), Confederation of British Industry, DARES (France), Department of Finance Canada, European Central Bank, European Commission, Federal Reserve, Federal Reserve Bank of Chicago, Federal Reserve Bank of Dallas, Federal Reserve Bank of New York, Federal Reserve Bank of Philadelphia, Federal Statistical Office (Germany), Forex Crunch, ForexLive, GfK Group, Halifax and Bank of Scotland, Ifo Institute, INSEE (France), Institute for Supply Management, Ivey Business School, Judo Bank, Ministère de l'Économie et des Finances (France), Ministry of Economy Trade & Industry (METI, Japan), Ministry of Finance (Japan), Ministry of Internal Affairs & Communications (Japan), Ministry of Land, Infrastructure, Transport and Tourism (Japan), National Association of Home Builders, National Association of Realtors, National Australia Bank, Nationwide Building Society, New Zealand Treasury, NZIER, Office for Budget Responsibility (UK), Office for National Statistics (UK), RealClearMarkets/TIPP, Reserve Bank of Australia, Reserve Bank of New Zealand, S&P Global, Standard & Poor's, Statistics Bureau of Japan, Statistics Canada, Statistics New Zealand, Tankan Sponsored by Thomson Reuters, Technometrica Market Intelligence, Trading Economics, U.S. Bureau of Labor Statistics, U.S. Census Bureau, U.S. Department of Labor, U.S. Treasury, University of Michigan, Westpac Banking Corporation, Melbourne Institute.