Steady risk mood weighs on JPY

A quiet session, but steady risk mood weighs on JPY.  GBP showing cracks, but CAD bears unnerved by BoC statement – OPEC tomorrow.

Wednesday’s FX price action was a subdued affair, which was anticipated to a larger degree given the barren data schedule ahead of the FOMC minutes due later on in the North American session.  While the odds of a move in June had receded to around 70%, they have been pushed higher in line with an adjustment in Treasury yields and the USD, though there was little to discern which drove which.  That said, after some persistent selling over recent sessions, the greenback was due some near term relief, with today’s lack of event risk providing an obvious opportunity. 

USD/JPY continues to struggle around the 112.00 level, but the risk mood has been modestly elevated – more so in relief than anything else.  We can put this down to the Comey testimony next week falling out of near term focus, while the steady rise in Oil price has also smoothed out some of the nervousness in stocks.

Looking past tonight’s Fed minutes, tomorrow’s OPEC meeting is one of the main events this week, but with so many comments heavily suggesting that an extension is likely, the risk is potentially skewed to the downside, as we sense the hopes of a 9 month deal have been significantly baked in.  As such, a 6 month deal may prove a touch disappointing, but as we saw in the DoE report, Saudi Arabia’s suggestions that the current output levels have yet to be reflected in inventory may be starting to come to ‘fruition’.

Earlier today, the BoC kept rates on hold as widely expected, and that this policy stance will be maintained in light of below target (sluggish) inflation, with wage growth also slow. Despite this, there was a hint of cautious optimism, and this may be attributed to their view that the global outlook is gaining traction.  Worthy of note was their assertion that Canada has adjusted to lower Oil price levels, and gave the CAD an added boost, and will continue to do so if OPEC ‘deliver’ tomorrow. New cycle lows seen in USD/CAD as a result, but the moves will be dogged by USD buying as rate differentials will be back in focus soon – very soon.   1.3430 is the first point of support, which has held - tentatively so. We may struggle for an aggressive push lower ahead of the Fed minutes.

GBP is now starting to show cracks, but as long as Cable holds off 1.2900, we can expect more range bound trade ahead.  There is no disputing the longer-term picture is serving as the primary factor in this latest bid tone, but looking past the Jun 8 general election, we have to assume the Brexit negotiations will be cause for concern.  Whether this develops into a meaningful pullback through 1.2800 is debatable, but unlikely based on the price action seen so far, with EUR/GBP also struggling for upside traction.  Pre-0.8700 still a strong area of resistance but 0.8600 held firm in the dip lower this morning.  UK GDP Q is the second reading on Thursday morning, and no revisions expected from the advance 0.3% reported.

The EUR is going through a phase of consolidation, and we see little in this pullback despite the obvious references from ECB members that current policy appropriate.  We see limited prospect for a move to beyond 1.1000, if indeed we get anywhere near this level, with 1.1280-1.1300 resistance likely to prove temporary unless the US data takes a significant turn higher. 

For NZD, it is all about the budget announcement tonight, but strong gains against the USD and AUD have been suggestive of a large part of the optimistic forecasts now being priced in.  We see room for further progress, and AUD/NZD in particular looks vulnerable ahead of 1.0600.  NZ trade was also better than expected overnight, so the outlook is looking good and

Australian construction work done over Q1 was softer than expected this morning, and this is the first contributor the growth stats, which are released in early June. Copper has also come off the boil again, so the cross rate above has further legs to another downside break.  NZD/USD could also test back to 0.7100, with the rate of gains dependant on Yellen and Co.