FX Update: USD triangulating. Fresh pressure on JPY.

Bank of England Chief Economist Pill was out this morning touting inflation risks and the importance of avoiding second round effects, while also noting that monetary policy is a “blunt tool” for moving against inflation, while admitting that the BoE is willing allow growth to weaken if that is what it takes to move inflation back to the target. The market hasn’t been particularly volatile during a series of comments this morning as short UK yields trade at cycle highs, but it was interesting to see Pill bring up the exchange rate in his comments, as something that needs to be taken into account. With global commodities priced in US dollars and the GBPUSD rate having fallen some 10% from its January highs, it is an important point.

A speech from RBA governor Philip Lowe overnight took Australia’s short yields a notch lower as that the July hike from the RBA would be 50 basis points at most, moving the market to cut anticipation of a larger rate hike – and in a Q&A, Lowe said that the board would only consider a rate hike o 25- to 50 basis points. The RBA sees Australian inflation rising toward 7% in Q4 of this year. Given that the RBA is the only central bank that still meets on a monthly basis, this doesn’t have to look so dovish, as the bank can simply hike 50 basis points at every meeting if conditions dictate. More than from the RBA, the risk for further AUD weakening stems from any return of weak global market sentiment, and more specifically, to Chinese demand concerns as key commodity prices are struggling. Copper, for example, a bellwether metal is trading near the range lows stretching back and Australian mining giant BHP Billiton’s share price is hovering near its 200-day moving average.

Noted hawk James Bullard, president of the St. Louis Fed, was out with fresh hawkish comments yesterday, but the market has not reacted to these. He emphasized that it is important for the market to move as quickly as the market is currently pricing and to prevent inflation expectations from coming “unmoored”. He highlighted the interesting divergence in actual inflation readings and falling inflation predicted by TIPS (inflation protected US treasuries), which “will have to be resolve, possibly resulting in higher inflation expectations”. US Fed Chair Powell is set for two days of testimony before Senate and House panels tomorrow and Thursday, respectively. For USD direction, I have eyes firmly pinned on whether the US 10-year treasury yield remains tamed. On Friday, we get the final June University of Michigan sentiment survey, which includes a longer-term inflation expectations survey that garnered huge attention when it suddenly jumped to 3.3% from 3.0% in the initial June release.

Table: FX Board of G10 and CNH trend evolution and strength.
As noted, the US dollar has been triangulating since last week’s FOMC and will need to choose a tactical direction soon. NOK is in for a test on Thursday on the Norges Bank and whether it is set to change its cautious pace of rate tightening. Elsewhere, CHF impulsive strength on the back of last week’s SNB has yet to blossom.

Table: FX Board Trend Scoreboard for individual pairs.
The individual pairs are short on tactical developments but watching whether the USD comes under pressure or renews its bull trend in coming sessions. Note AUDCAD at a tipping point supposedly, but actually trading in a volatile range – likely to copy the direction of AUDUSD from here. And speaking of AUD charts – watching EURAUD for upside break potential if 1.5200 breaks.

Upcoming Economic Calendar Highlights (all times GMT)

• 1000 – UK Jun. CBI Trends in Total Orders and Selling Prices
• 1230 – US Chicago Fed National Activity Index
• 1230 – Canada Apr. Retail Sales
• 1400 – US May Existing Home Sales
• 1600 – US Fed’s Mester (Voter) to speak
• 1930 – US Fed’s Barkin (Non-voter) to speak
• 2350 – Japan BoJ Minutes of April Meeting