Major political developments in Japan and the Eurozone as well as the powerful earthquake in New Zealand are likely to have notable short-and long-term effects on the yen, euro, and broader forex market.
The US dollar (USD) is trading slightly lower against all major currencies with its losses extended after disappointing US economic data. Existing home sales dropped 1.2% in the month of June, falling from 5.14 million to 5.08 million. The decrease caught investors by surprise because sales of previously owned homes were expected to slow, but they were not expected to decline, especially after the Fed's Beige Book report talked about stronger housing activity.
Compared to last week, forex market activity should be much quieter this week. There's not much in the way of market-moving US data, and the most significant event risks will be the Eurozone PMI reports.
Although Portugal's coalition parties and main opposition party failed to reach an agreement, the current government has enough of a majority to avoid early elections, according to President Anibal Cavaco Silva. Holding elections before 2015 would have created renewed political uncertainty for the country, the region, and the euro (EUR), so this was an ideal scenario for Portugal and the Eurozone.
More Stimulus Coming Soon to Japan
In Japan, the Liberal Democratic Party (LDP) win also lifted the Japanese yen (JPY), as the victory allows Prime Minister Shinzo Abe to move forward with his growth strategy, better known as the “Third Arrow of Abenomics.”
This will include removing trade and investment barriers wherever possible in Japan, and imparting comprehensive regulatory reform, deregulation, tax reforms, and the creation of “national strategic special zones” where the distance between home and work is short. The LDP win will facilitate the approval and implementation of economic policies that will be very good for Japan in the long run.
See also: The USD/JPY Showdown Happening Right Now
Disaster Strikes New Zealand, Again
The Reserve Bank of New Zealand (RBNZ) meets this week, and despite the rally in the New Zealand dollar (NZD) today, a powerful earthquake that damaged buildings in the capital of Wellington raises the risk of a rate cut.
Thankfully, while the 6.5-magnitude tremor was stronger than the 6.3-magnitude Christchurch quake in in February 2011, no casualties were reported. After the earthquake initially hit in 2011, the NZDUSD sold off aggressively, but bottomed the following month after the RBNZ cut interest rates by 50 basis points (bps). It then went on to hit a record high against the US dollar in August that same year as rebuilding efforts contributed positively to the economy.
The latest earthquake could alter the landscape for the RBNZ at this week’s meeting. With slower Chinese and Australian growth, we had been looking for the Bank to be dovish, but it could consider lowering rates again if policymakers feel that economic activity will now be negatively affected by the quake.
By Kathy Lien of BK Asset Management