Commodity currencies started the new week on a flat note against the USD, with EUR and JPY showing modest gains.
Since the last daily report on Friday morning a run of soft business confidence data has dampened market sentiment and led to a mild risk-off tone.
Preliminary April PMI data across Japan, Europe and the US all undershot expectations, consistent with a global economy that is middling along.
Overnight, a weaker than expected Germany IFO business climate index and softer than expected US new home sales added weight to this theme.
Not helping the mood has been a fall in oil prices, although nothing dramatic considering the recent fresh highs achieved.
Reports of expanding oil production in Kuwait, Iran and Saudi Arabia have helped push crude oil prices lower. Saudi Arabia will complete an expansion of its major Shaybah oil field by the end of May, allowing the country to maintain output capacity at 12 million barrels a day.
Over the last couple of trading sessions the yen has been in the spotlight. The yen weakened by over 2% on Friday after Bloomberg reported that the BoJ might consider helping banks lend by offering a negative rate on some loans. Some of that weakness has been retraced. USD/JPY is down 0.5% to 111.25, but still well up on Friday afternoon’s level of 109.30.
At Thursday’s BoJ meeting, a majority of analysts surveyed by Bloomberg expect the bank to expand policy stimulus, with most expecting increased purchases of equities via exchange-traded funds. Bond buying and a further move into negative rates are less favoured, with policy on that front nearly at its practical limits.
GBP broke through 1.45 to reach a two-month high as Brexit risks seem to be diminishing by the day. Polling is showing increasing support for the UK to remain in the EU. US President Obama has weighed into the debate, urging UK citizens to vote to remain in the EU. The strong GBP has had a positive spillover effect on EUR, which is trading up 0.4% at 1.1260.
NZD and AUD have both drifted lower compared to Friday afternoon levels. NZD is currently trading at 0.6845, within a tight range overnight. AUD is just above the 0.77 handle and NZD/AUD is at 0.8885.
The FOMC and RBNZ meetings on Thursday morning provide an opportunity for some market volatility. While the FOMC’s decision to leave rates unchanged and maintain its “data-dependent” line is a straightforward call, no one is really certain what the RBNZ will do.
Our out-of-consensus call for the RBNZ to cut rates and keep the door open for more would help the NZD soften on the day, while the Bank remaining on the sidelines could encourage a move to retest the 0.70 handle. More on this in coming days when space allows.
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