What only a few days ago seemed like a done deal is now rife with uncertainty. We are referring of course to the possibility of  the Fed rate hike rate at the August FOMC meeting. Fed fund futures which in the aftermath of the “hot’ CPI numbers earlier this week spiked to above 80% probability have scaled back the odds down to even money as the ramifications of Fed Chairman Bernanke’s guarded testimony continue to resonate throughout  the currency market.  With the Fed signaling a more neutral rather hawkish posture, currency  markets continued to sell dollars as US rate hike expectations are pared down.

 

In tonight’s trading no currency has been the bigger beneficiary of this change in sentiment that the Japanese yen which up to now was the biggest victim of interest rate spread speculation.  The yen fell  to multi year lows against the British pound and near all time lows against euro earlier in the week but tonight yen appreciated materially with  USD/JPY tumbling more than 100 points breaking the 116.00 level for the first time in five days. The move downward occurred despite statements by BOJ Deputy Governor Toshiro Muto that Japanese rates are likely to remain low for an extended period of time as the central bank tries to gradually normalize monetary policy to ensure that the ongoing Japanese economic recovery is not damaged in the process. 

 

In the currency markets however,  it is not the absolute value of the carry that matters but the future  direction of the interest rate spreads. If the US  rate hike cycle will indeed come to a halt at 5.5%, as many market players now anticipate,  while the BOJ proceeds, albeit slowly, to push rates higher yen should continue to strengthen against the greenback. Tonight’s price action may be a signal that the USD/JPY up move is finally exhausted, as traders cast their eye to the future of shrinking interest rate differentials between the two currencies.


FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

CAD

11:00

7:00

CPI (MoM) (JUN)

0.1%

0.5%

CAD

11:00

7:00

CPI (YoY) (JUN)

2.8%

2.8%

CAD

11:00

7:00

CPI ex Core 8 (MoM) (JUN)

0.1%

0.5%

CAD

11:00

7:00

CPI ex Core 8 (YoY) (JUN)

2.1%

2.0%

 

Currency

GMT

Release

Actual

EST

Previous

Comments 

JPY

23:50

All Industry Activity Index (MoM) (MAY)

-0.2%

-0.4%

1.3%

Better than expected.

AUD

1:30

New Motor Vehicle Sales (MoM) (JUN)

-1.7%

 

0.5%

Declined from May.

AUD

1:30

New Motor Vehicle Sales (YoY) (JUN)

-5.1%

 

-2.7%

AUD

1:30

Export Price Index (QoQ) (2Q)

3.6%

4.5%

5.1%

Worse than anticipated.

AUD

1:30

Import Price Index (QoQ) (2Q)

2.3%

1.5%

1.3%

NZD

3:00

Credit Card Spending s.a. (YoY) (JUN)

8.2%

 

11.4%

Slowed slightly in June.

EUR

6:45

French Consumer Spending (MoM) (JUN)

1.7%

0.0%

0.6%

Far higher than expectations.

EUR

6:45

French Consumer Spending (YoY) (JUN)

5.6%

3.6%

5.6%

EUR

7:30

Italian Consumer Confidence Indicator s.a. (JUL)

108.7

107.8

106.8

Improved sentiment.

EUR

8:00

Italian Non-EU Trade Balance (euros) (JUN)

-770M

-625M

-1608M

Deficit widened more.

GBP

8:30

Gross Domestic Product (QoQ) (2Q)

0.8%

0.7%

0.7%

Growth in the UK accelerated.

GBP

8:30

GDP (YoY) (2Q)

2.6%

2.5%

2.3%

EUR

9:00

Italian Retail Sales s.a. (MoM) (MAY)

-0.1%

0.2%

0.6%

Disappointing figures in May.

EUR

9:00

Italian Retail Sales (YoY) (MAY)

1.5%

1.7%

2.7%