It may be a new trading week but last week’s themes have carried over to Monday’s trade as the greenback extended its losses against all most of the major currencies. The Australian and New Zealand dollars were the biggest gainers after RBA Governor Lowe openly mused about the effectiveness of more rate cuts if “everyone is easing.” This is an awkward comment because while its true that contemporaneous reduction in rates could result in exchange rate parity, lower borrowing costs goes a long way in helping businesses and consumers domestically. Regardless, the market bid AUD and NZD higher as they interpreted this to mean that the central bank could forgo a rate cut next week. The RBNZ meets on Wednesday and today’s gains- which marks the fifth straight day of strength in NZD/USD suggests that investors are not looking for excessive dovishness, let alone a follow up cut.
For the most part, it has been a quiet start to what should be another busy trading week. Here are the 5 things to keep an eye on:
1. G20 Summit – The G20 Summit at the end of the week is the main focus. Based on the price action in the markets, investors are looking for trade talks to resume. The tone of the Trump Administration has taken a turn for the better but the Chinese are skeptical. President Trump and President Xi have agreed to a meeting and as long as it is not cancelled, we expect high beta currencies to maintain their bid against the US dollar. However should either side cancel the meeting, risk aversion will return instantly, leading to sharp declines in major currencies and flight to safety back into the US dollar. Whether they agree to work towards a deal is a different story and one that will have a greater impact on next week’s (and not this week’s) trade.
2. Fed Speak – Now that the central bank’s quiet period is over, there are a significant amount of Federal Reserve officials scheduled to speak including Fed Chairman Powell. While we know exactly where the Fed stands (they will be lowering interest rates this year), a reassurance by Powell in the form of dovish comments could turn consolidation into losses for USD/JPY. The next support level for the pair is 106.50.
3. Reserve Bank of New Zealand Meeting – The only monetary policy meeting on this week’s calendar is the RBNZ and last time they met, they cut interest rates but suggested that they were one and one. Investors will be eager to see if that remains true or if they feel additional easing is needed like the RBA.
4. BoE Speak – Very little was revealed at last week’s Bank of England monetary policy meeting. They left interest rates unchanged, acknowledged the risks in the economy but indicated that rates could be increased if their forecast was met. On Wednesday BoE Governor Carney will be testifying before Parliament on the May Inflation Report so expect more clarity on monetary policy. This speech could have a significant impact on sterling.
5. Iran Backlash? Tensions are high in the Gulf with President Trump signing an executive order to impose additional “hard hitting” economic sanctions on Iran today. Their hope is that maximum pressure would bring Iran back to the negotiation table but if it leads to more provocation in the form of other non-fatal attacks, we could see renewed anxiety in the markets.