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US Dollar Outperforms with Volatility Ahead Thanks to BoE, ECB

By , Currency Analyst
05 September 2013 10:20 GMT

Talking Points

- Bank of Japan on hold; Governor Kuroda strikes dovish tone.

- US yields back near yearly highs supporting US Dollar.

- Turbulent few hours ahead with two central bank announcements due.

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INTRADAY PERFORMANCE UPDATE: 09:25 GMT

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

-0.37%

-0.01%

-0.46%

-0.13%

-0.07%

-0.14%

-0.47%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.09% (-0.30%prior 5-days)

ASIA/EUROPE FOREX NEWS WRAP

The Dow Jones FXCM Dollar Index remains off of its highs of the day and is lower over the past week overall, but that’s been a function of the Australian Dollar outperforming the broader market; not a sign of general US Dollar weakness. Today, the buck finds itself barely in the green amid a flurry of central bank activity.

Overnight, the Bank of Japan announced its September policy decision and although no formal changes were made, Governor Haruhiko Kuroda took on a relatively more dovish tone. The big picture – that the Japanese economy is showing signs of improvement on the growth and inflation fronts – was duly noted.

Stemming from this economic optimism have been calls for a higher sales tax to help combat the country’s mounting debt burden (now exceeding ¥1 quadrillion). Knowing this full-well and the implications of a sales tax on inflation, Governor Kuroda noted that the BoJ is prepared to introduce further stimulus should higher taxes encumber the economy – an outcome I began discussing in late-July. (Read more: Japanese Yen Extends Gains as Japan’s ‘Third Arrow’ Becomes Clearer)

With the BoJ remaining in full-on easing mode (which has supported the JPY-crosses thus far today), attention now turns to the Bank of England and the European Central Bank. In a way, both of these central banks face a similar dilemma: attempting to keep interest rates low amid an upswing in economic growth prospects.

Between the two, the British Pound is better poised fundamentally to outperform than the Euro after these central bank meetings. Whereas the BoE desires to keep rates pointed towards zero in the nascent stages of the UK growth jump, incoming economic data has been consistently beating forecasts, accelerating the timeline (from a speculator’s perspective) that the BoE would end QE in.

Conversely, the Euro is at risk as ECB President Mario Draghi may want to avoid overbearing optimism insofar as it could stoke tighter credit conditions. Credit remains tight in the Euro-Zone, as President Draghi harped on last meeting; and he will thus do his best to prevent a further backing up of yields. Read my full take on the ECB and the Euro here: Euro Risks Weighted to Downside Ahead of ECB, NFPs.

USDJPY 1-minute Chart: September 5, 2013 Intraday

US_Dollar_Outperforms_with_Volatility_Ahead_Thanks_to_BoE_ECB_body_Picture_1.png, US Dollar Outperforms with Volatility Ahead Thanks to BoE, ECB

Read more: RBA, ECB, BoE, Oh My! Central Banks Dominate Calendar; US NFPs Friday

ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION

US_Dollar_Outperforms_with_Volatility_Ahead_Thanks_to_BoE_ECB_body_x0000_i1028.png, US Dollar Outperforms with Volatility Ahead Thanks to BoE, ECB

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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05 September 2013 10:20 GMT