Currency markets ignited a week brimming with pivotal economic events with fireworks.
The Bank of Japan | Shutterstock
On Monday, the Bank of Japan stepped in to bolster the value of the rapidly depreciating yen, as the dollar-yen exchange rate plummeted to 160, marking a 34-year low and indicating a 10% drop since the beginning of the year. This intervention involves selling foreign exchange reserves to purchase domestic currency, although the scale of this action remains undisclosed. In the last occurrence of such intervention in October 2022, the BoJ purchased approximately 9.2 trillion yen ($60.78 billion) to defend the currency. The initial market reactions saw the yen's value surge by as much as 3% to 155 per US dollar, before retracing some of those gains.
The United States braces for two critical events: The Federal Reserve meeting on Wednesday and the release of the April jobs market report on Friday.
The Fed convenes amidst American inflation data consistently surpassing expectations in the first quarter of the year, signaling a stagnation in progress towards achieving the 2% target.
In his latest public remarks, Fed Chair Jerome Powell stated that "it is appropriate to let restrictive policy take further time to work," effectively quashing speculations on imminent rate cuts.
As for the jobs report, economists anticipate a slight deceleration in nonfarm payroll growth from 303 thousand in March to 243 thousand in April, with the unemployment rate projected to hold steady at 3.8% and wage growth maintaining a stable trajectory.
Year-To-Date Performance Of Major Currencies: USD Leads, JPY Lags
US dollar update:
On Tuesday, the dollar index (DXY) surged above 105.8 in anticipation of the highly awaited Federal Open Market Committee meeting scheduled for Wednesday. Last week, the Personal Consumption Expenditure (PCE) price index, the Fed's preferred measure of inflation, revealed a higher-than-expected figure, while the US gross domestic product for the first quarter grew less than anticipated. The Fed is set to maintain interest rates at their current levels and to adopt a more hawkish tone compared to previous meetings. Powell is likely to reiterate the importance of maintaining unchanged restrictive policy rates for an extended period to counteract recent inflationary surprises. Markets are already factoring in a more stringent stance, with expectations of only 35 basis points of cuts – indicating that only one cut is fully priced in – by December 2024.
Euro update:
Tuesday's preliminary data, unveiling a stronger-than-anticipated 0.3% economic growth rate for the eurozone in Q1, elicited a positive response from the euro, while the overall inflation rate held steady at the expected 2.4%. With inflation dynamics aligning closely with economist estimates, a June rate cut by the European Central Bank (ECB) appears increasingly probable. Investors are currently factoring in a total of 76 basis points of rate cuts by year-end, indicating expectations for three fully priced 25-basis-point cuts by the ECB.
Japanese yen update:
On Tuesday, the Japanese yen eased to 156.90 after briefly touching 155 levels in response to the BoJ intervention on Monday. Investors currently perceive the intervention as a one-off occurrence, unlikely to significantly reverse the yen's depreciating trend, given the substantial interest rate differentials between the Federal Reserve and the Bank of Japan. During their April meeting, Japanese monetary authorities opted to keep interest rates unchanged, failing to convey a commitment to raise them.
Chart Of The Week: USD/JPY Showcased A Wild 3% Loss Minutes After BoJ Intervention, Before Trimming Losses
Trade ideas of the week
Short EUR/USD
- Entry: 1.0727
- Stop loss: 1.0860
- Take profit: 1.0450
- Risk-reward: 2.1
EUR/USD Analysis:
Earlier this month, the euro-dollar exchange rate broke out of a symmetric triangle pattern it had been trading within since October 2023.
Negative yield spread of 2 percentage points between short-term bonds in Germany and the United States continue supports a bearish trajectory, potentially limiting any near-term rebounds. The relative strength index (RSI) has trended below 50 since April 9, confirming the breakdown of the triangle and indicating bearish dominance. A hawkish stance from the Fed could ignite further downward pressure on EUR/USD, with key support levels at 1.06 (April 2024 lows), 1.05 (psychological level), and 1.045 (October 2023 lows). Traders may target the latter ahead of the European Central Bank meeting next week, which is expected to pave the way for a rate cut in June. Placing a stop at 1.0866 (April’s high close) would offer protection in case of a cooler-than-predicted US jobs report on Friday or if the ECB hints at delaying a rate cut in June.
Long USD/CHF
- Entry: 0.9135
- Take profit: 0.9775
- Stop loss: 0.89
- Risk-reward ratio: 2.9
USD/CHF analysis:
The USD/CHF pair appears poised for another upward movement driven by significant rate differentials between the US and Switzerland, coupled with the ongoing sale of domestic currency to support foreign exchange reserves by the Swiss National Bank.
Currently, the 2-year yield differential stands at 4 percentage points (or 400 basis points), making the long carry trade in USD/CHF quite appealing. The last time rate differentials were as wide as they are today was in November 2022, when the dollar traded above parity against the Swiss franc, approximately 10% higher than current levels.
A compelling medium-term target for the pair could be around 0.9775, which represents the 78.6% retracement of the high-to-low range observed between 2022 and 2023.
Long AUD/NZD
- Entry: 1.0995
- Take profit: 1.1370
- Stop loss: 1.0844
- Risk-reward ratio: 2.4
AUD/NZD analysis:
For the past two months, the Australian dollar has been trending higher against the New Zealand dollar, with the pair surging from 1.0560 to the current level of 1.10. This level serves as a psychological resistance that has contained bullish momentum in the last two sessions.
Still, technical signals remain supportive for further upward movement, especially after the key moving averages formed a "golden cross," indicating a bullish trend as the 50-day moving average crossed above the 200-day moving average. The highs of 2023 at 1.1080 are within close range, and it is foreseeable that the market may test those levels in the upcoming sessions. Currently However, an overbought relative strength index (RSI) may slow the pace of the surge.
Beyond 1.1080, bulls would encounter resistance at 1.1170 (late October 2022 highs), before entering the hot range between 1.12 and 1.15. A medium-term target of 1.1370 could represent a viable bullish extension of the current AUD/NZD trend, while placing a stop loss below April lows at 1.0844.
The AUD’s key long-term drivers include stronger commodity prices and a resurgence in the Chinese economy, both of which have recently shown promising signs.
*The information contained on this page does not constitute a record of our prices, nor does it constitute an offer or solicitation for a transaction in any financial instrument. FlowBank SA accepts no responsibility for any use that may be made of these comments and for any consequences that may result therefrom. Any person who uses it does so at their own risk.
