Surprise BOE, SNB rate hikes boost GBP, CHF in choppy trade

Dollar Wilts Post Fed 0.75% Rate Rise; JPY Soars; Stocks Slump

Summary: “Oh baby, baby, it’s a wild world” echoes of Cat Stevens’ 1971 hit aptly described the roller coaster ride of FX markets overnight. Global central banks moved aggressively to tighten policy rekindling fears that economies would get dragged into recession. Yesterday, the US Federal Reserve increased its Fed Funds Rate to 1.75% from 1.0%, surprising some analysts who had forecast a 50bp increase. On Wednesday the Dollar Index (DXY), which measures the value of the Greenback against a basket of 6 major currencies soared initially on Wednesday to 105.20 before plummeting to 103.82 in late New York. Overnight, the Bank of England and Swiss National Bank swiftly followed suit, increasing their prime interest rates. The SNB lifted its Policy Rate by 50 basis points to -0.25% (from -0.75%) while the Bank of England hiked its Official Bank Rate to 1.25% from 1.0%. The Swiss France rocketed higher against the Greenback, gaining a whopping 2.9%. The USD/CHF pair was last at 0.9665 from 0.9955 yesterday. Sterling (GBP/USD) soared 1.45% to 1.2365 from 1.2163 yesterday. The Euro rebounded 0.87% against the Dollar to finish at 1.0550 from 1.0448. The shared currency found a reprieve in the Greenback after being in the doldrums most of this week. The Australian Dollar (AUD/USD) lifted 0.4% against the broadly based weaker Greenback to 0.7045 (0.7005) despite the fall in asset prices. Against the Japanese Yen, the Greenback tumbled 1.42% to 132.20 (134.18). The Dollar was mostly higher against the Asian and Emerging Market currencies. The USD/CNH (Dollar-Offshore Chinese Yuan) pair rose to 6.6875 from 6.6775 while the USD/THB (Dollar-Thai Baht) settled 0.35% higher to 35.00 (34.80).

Weaker-than-expected US economic data weighed on investor confidence and increased risk aversion. Global stocks tumbled with the DOW down 2.27% at the close of trade to 29,987 (30,770 yesterday). The S&P 500 lost close to 3%, finishing at 3,677 (3,805).

Global bond yields were mixed. The benchmark US 10-year Treasury note rate slumped to 3.20% (3.28% yesterday). Japan’s 10-year JGB yield climbed two basis points to 0.25%. Germany’s 10-year Bund yield was last at 1.71% (1.63% yesterday).

Data released yesterday saw Australia’s Employment gain to 60,600 against expectations of 2,500 while the Unemployment Rate rose to 3.9% against forecasts at 3.8%. The US Philadelphia Fed Manufacturing Index fell to -3.3 from a previous 2.6, missing estimates at 5.1. US Weekly Unemployment Claims dipped to 229,000 from a previous 232,000 but higher than expectations of 215,000. US May Building Permits fell to 1.70 million units from a previous 1.82 million. US May Housing Starts were also down, to 1.55 million from a previous upwardly revised 1.81 million (from 1.72 million), but lower than median estimates at 1.70 million.

• EUR/USD – The shared currency found some respite against the overall weaker Greenback, finishing at 1.0550 from 1.0448 yesterday, up 0.87%. In volatile trade, the overnight low for the Euro was at 1.0381 while the high recorded was at 1.0601. Last week, ECB President Christine Lagarde set out plans for a 25-basis point rate increase next month.
• AUD/USD – The Aussie Battler was also buoyed by the broadly based weaker Greenback. Far from down and out, the AUD/USD pair found itself above the 0.70 cent mark, finishing at 0.7045 from 0.7005 yesterday. Overnight, the AUD/USD pair tumbled to a low at 0.6943 before rallying.
• USD/JPY – The haven sought Japanese Yen came roaring back against the US Dollar and other rivals. The Greenback plummeted 1.42% against the Yen to 132.20 from yesterday’s 134.18. In volatile, choppy trade the USD/JPY hit an overnight low at 131.49 before stabilising. Overnight high traded was at 134.68. Happy days!
• GBP/USD – Sterling soared against the Greenback to finish at 1.2365, gaining 1.44% from yesterday’s 1.2163. Following the Bank of England’s decision to increase its Official Bank Rate by 25 bps to 1.25%, the British Pound took flight against the US Dollar. Overnight high traded was at 1.2407. The decision by the BOE to increase rates was unanimous with all 9 MPC members voting for the rate hike.

On the Lookout: As we come to the end of this week, and being a Friday, we can expect more choppy trading ahead. The Bank of Japan kicks off with its Interest Rate policy meeting (Asia, no specific time given). The BOJ is widely expected to maintain its BOJ Policy rate at -0.10%. A press conference follows the meeting where markets will be looking for any clues. We can be sure that the BOJ will want to keep the Yen stable so watch for any verbal intervention. There are no other data releases out of Asia. Europe kicks off with the Eurozone Final CPI for May (m/m f/c 0.8% from 0.6%; y/y f/c 8.1% from 7.4% - ACY Finlogix). Italy releases its April Balance of Trade data (f/c -EUR 2.26 billion from previous -EUR 0.084 billion – Forex Factory). Canada starts off North America with its May PPI (m/m no f/c, previous was 0.8%; y/y no f/c, previous was 16.4% - ACY Finlogix). The US rounds up today’s calendar with US May Capacity Utilisation (f/c 79.2% from 79% - ACY Finlogix), US May Industrial Production (m/m f/c 0.4% from 1.1%; y/y no f/c, previous was 6.4% - ACY Finlogix), US May Manufacturing Production (m/m f/c 0.4% from 0.8%; y/y no f/c, previous was 5.8% - ACY Finlogix), and finally US May Conference Board Leading Index (m/m f/c -0.4% from -0.3% - ACY Finlogix). The one notable event is a speech by US Fed President Jerome Powell in Washington DC. Powell will deliver the welcoming remarks at the Inaugural Conference on the International Roles of the US Dollar.

Trading Perspective: After its initial Fed Reserve ignited rally earlier in the week, the Greenback fell back down to earth as other global central banks (SNB, BOE) followed suit with rate hikes of their own. The DXY (Dollar Index) fell back to earth, plummeting 1.28% to 103.82 (105.20). Expect the Greenback to find some support against its rivals at current levels. USD/DXY has immediate support at 103.40 (overnight low traded 103.42). The next support level is found at 103.00-20. A break lower could see us back to the 102.50 level. On the topside, immediate resistance lies at 104.10 and 104.40. A break above 104.50 will see us back to the 105.00 level.

The one common denominator in FX remains volatility. Today, being a Friday, expect no different. These are the ideal markets for traders who can take advantage of the many swings in each currency pair. Keep vigilant, stay flexible and keep those tin helmets on.

• EUR/USD – The Euro rebounded against the Greenback to finish at 1.0550 in late New York. On the day, immediate resistance can be found at 1.0580 followed by 1.0610 (overnight high traded was 1.0601). On the downside, look for immediate support at 1.0520, 1.0490 and 1.0460. A break below 1.0460 could see us back down to the 1.0400-20 area. Expect more choppy trade in a likely range today of 1.0470-1.0570. Just trade the range shag on this one.
• AUD/USD – The Aussie Battler sprouted to life against the weaker Greenback, rallying to settle at 0.7045 from its close of 0.7005 yesterday. Overnight high traded was at 0.7069, which puts immediate resistance today at 0.7070. The next resistance level is found at 0.7100. Immediate support lies at 0.7010 and 0.6980. Look for another choppy session in this currency pair, expect a likely trading range between 0.6985-0.7085. Stay nimble, trade the range.
• GBP/USD – Immediately after the BOE lifted rates by 0.25 bps, Sterling was pounded lower. Following yesterday’s close at 1.2165, the GBP/USD pair tumbled to 1.2041 before rebounding strongly to finish at 1.2365 in volatile trade. Weaker-than-expected US economic data weighed on the Greenback, providing much needed support for the British currency. Immediate resistance lies at 1.2400 and 1.2440. On the downside, look for immediate support at 1.2330, 1.2290 and 1.2240. Look for another choppy session in this currency pair, likely range 1.2250-1.2400. Tin helmets on here for sure.

(Source: Finlogix.com)

• USD/JPY – The Japanese Yen found its comeback versus the US Dollar amidst the climb in risk aversion. The USD/JPY pair tumbled 1.42% to settle at 132.20 from yesterday’s close at 134.18. Overnight low traded was at 131.49. On the topside, the overnight high traded was at 134.68. For today, look for immediate support at 131.80 followed by 131.50 and 131.20. On the topside, immediate resistance can be found at 132.50, 132.80 and 133.20. The Bank of Japan has its policy meeting today and will most likely maintain its Policy rate at -0.10%. What will be interesting will be Japan Inc.’s attempts to verbally keep the Yen weak. We could be in for another choppy ride today, likely range 131.70-133.70.

Keep those tin helmets on, its Friday. Top trading day and weekend ahead to all.