Today’s Fed speeches, US economic data, and the potential for new Bank of Japan stimulus are among the events that could spur new gains in US dollar-based pairs in upcoming sessions.
The US dollar (USD) is trading higher against all major currencies this morning, but the bulk of the action was out of Asia.
In the US, better-than-expected trade numbers barely left a dent on the FX market because the trade deficit still increased. The US trade balance dropped to -$40.3 billion from -$37.1 billion in the month of April. Despite the wider deficit, exports and imports both ticked higher, which is good news because it reflects stronger external and internal demand. In fact, even with the recent rise in the US dollar, exports hit the second-highest level ever.
The more interesting event risks today will be the speeches from Federal Open Market Committee (FOMC) voters Sarah Bloom Raskin and Esther George (Kansas City). These two Fed Presidents are on opposite ends of the spectrum, with Raskin being a dove and George a hawk. It will be interesting to see if they both agree that asset purchases should be tapered this year. If so, we could see renewed USD gains that could help USDJPY further extend its recovery above 100.
Up North, Canada also reported weaker trade conditions. The nation's deficit rose from (CAD) $3 million in March to $567 million in April. Imports surged to a record high on stronger energy demand, while exports suffered the first decline in five months. USDCAD held onto its gains, but like US data, Canadian trade numbers had very little impact on the Canadian dollar (CAD).
Instead, today’s moves in the FX market are being driven by a recovery in the US dollar. The Australian dollar (AUD) and New Zealand dollar (NZD) are each down about 1%. The greenback experienced a steep slide yesterday after disappointing US ISM numbers, but stocks did not collapse, and this resilience left investors with the hope that the rest of this week's data, which includes non-manufacturing ISM, the Fed’s Beige Book report, and Friday’s non-farm payrolls (NFP) report could still show strength in the US economy.
Meanwhile, it is worth noting that despite the rebound in Japanese stocks, a weak bond auction caused Japanese government bond (JGB) yields to jump overnight. The Bank of Japan (BoJ) is watching the volatility in the equity and bond markets very carefully, and if these moves do not settle soon, they could increase the frequency of bonds purchased later this month.
By Kathy Lien of BK Asset Management
