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Imminent rate hike, will USD/JPY break 115 again?

Wayne Ko Heng Whye Fullerton Markets Ltd

USD/JPY broke 115 before non-farm payroll, but crashed back below on profit taking. Will Fed rate hike this week push USD/JPY above 115 again?

A superb ADP non-farm payroll came in at 298K, the highest since January 2012. After the release, market revised their non-farm payroll forecast upwards to 196K. The actual non-farm payroll outperformed at 235K. The unemployment rate lowered to 4.7% and wage growth came in at 0.2%, fell slightly short of the expectation of 0.3%. In summary, the jobs data did not change the course of an imminent rate hike this week. Market is already looking beyond to the next possible rate hike by June. With such encouraging figures, we expect Fed to reaffirm they will stay on course for 3 rate hikes this year as long as growth remains healthy. If investors start to price in more than 50% chance of the next rate hike by the second quarter, we could possibly see USD/JPY heading beyond 115.

ECB and RBA left policy unchanged

Mario Draghi acknowledged economic growth and inflation. He recognised the economic risk has lowered and economic growth should continue. Although ECB left their policy unchanged, but Draghi’s comments were less dovish than expected. This has created a tough fight between the euro and the dollar. With the political uncertainties looming in Europe, we do expect euro to be slightly at a disadvantage against the dollar.

RBA kept their interest rate unchanged at 1.5%. Their mildly hawkish tone in their economic outlook failed to inspire the Aussie dollar. Fed rate hikes will close up the interest rate differentiate and the Aussie dollar will slowly lose its carry trade advantage. We expect the dollar to continue its dominance over the Aussie dollar.

3 other central banks to watch this week

Bank of Japan (BOJ) and Swiss National Bank (SNB) are expected to maintain their policy. Much of the work has been done by their counterparts. Fed upcoming rate hike pushed USD/JPY beyond 115. ECB less dovish comments lifted EUR/CHF close to 1.08, 13-week high. We do not expect much surprises from these two central banks.

Brexit and Scotland’s possible second referendum have taken their toll on the sterling. 9 out of 9 Monetary Policy Committee members are expected to vote to keep interest rate unchanged. There is definitely some chance of a surprise rate cut intention in the actual result. It would be also be interesting to hear what BOE Governor Mark Carney has to say. Dovish tone will add pressure to the sterling.

Our Picks

EUR/USD – Bearish. Fed rate hike is likely to push this pair towards 1.0620.

GBP/USD – Breakout. We expect this pair to breakout of the current consolidation during BOE announcement on Thursday.

XAU/USD (Gold) – Bearish. Consider going short when Stochastic goes above 80.

Top News This Week (GMT+8 time zone)

UK: Claimant Count Change. Wednesday 15^th March, 5.30pm.

We expect figures to come at 1.5% (previous figure was 1.5%).

US: Federal Funds Rate. Thursday 16^th March, 2am.

We expect figures to come in at 1.0% (previous figure was 0.75%).

UK: Official Bank Rate. Thursday 16^th March, 8pm.

We expect figures to remain unchanged at 0.25% (previous figure was 0.25%).

Fullerton Markets Research Team

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Author

Wayne Ko Heng Whye

Fullerton Markets Ltd

As Head of Research & Education in Fullerton Markets, Wayne provides thought-provoking analysis and trading ideas to thousands of clients worldwide.

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