Forex Institutional Research: Commerz Bank FX Daily
Key quotes from the Commerz Bank FX report:
G10 FX Research
USD: Yesterday’s data on consumer spending of US private households turned out positive. In April the Americans not only were surprisingly generous, the price index for consumer spending also rose notably compared to the previous month. However, the majority of market participants were unimpressed by these data releases. The USD exchange rates initially hardly reacted at all to the data. Only as a result of the disappointing sentiment indicators USD then traded weaker in the afternoon. The probability of a rate step until the end of July priced in by the market eased slightly to 64%. The asymmetrical reaction to the data is a little surprising. One could argue that the data on consumer spending did not surprise sufficiently positively and that this was why the market did not react. However, the market would be incorrect, as theoretically the data should have increased the likelihood of a Fed rate step in June or July. After all numerous FOMC members, including Fed chair Janet Yellen, had made a further improvement or at least no deterioration of the economic and inflation situation a condition for a rate hike. But why did the market participants only react to the disappointing sentiment indicators?
A possible explanation is that the majority of investors now feel as if over the past few years they have been misled by Fed policy too many times and are feeling once bitten, twice shy. Too often the Fed had promised a rate hike and then did not deliver. That results in the following: The share that does not believe in a rate step in the summer even after the hawkish comments by many FOMC members over the past few weeks is principally sticking to its position. Even data will not sway these investors. The share that has priced in a rate hike by the end of July over the past few weeks has been convinced by the comments of FOMC members. However, even amongst this share of market participants there are likely to be many who feel once bitten, twice shy. Once before the Fed had signalled a rate hike, that was last September. Then too things looked promising on the economic front. Only that the upheaval on the financial markets combined on the back of the difficulties in China then made the US central bank change its mind just a few weeks before the September meeting. In the end it postponed the rate hike to December. This behaviour illustrated to many market participants: absolutely everything has to be right for the Fed to hike interest rates. So should the US data disappoint, as sentiment indicators did yesterday, investors, in case of doubt, will again price out a rate hike. This in turn is likely to mean that the likelihood of a rate hike until late July priced in by the market is unlikely to exceed the recent high (approx. 70%) – regardless of how positive the data will be. And as a result positive data will no longer lead to a stronger USD. Disappointing data on the other hand can put pressure on rate expectations and the US dollar. If today’s data (ISM index) confirms this theory then we should not see significant dollar strength before the June meeting.
JPY: This morning Prime Minister Shinzo Abe postponed the VAT hike planned for the spring of 2017 by 2 ½ years, as had already been suspected. Abe is set to comment on the decision at a press conference at 6pm local time. What will be interesting will be to find out whether and if so to what extent he plans to increase government spending to stimulate the flagging economy. The more ambitious the fiscal programme the more the market is likely to speculate on a continued expansionary, if not even more expansionary monetary policy that will ensure that the Japanese governement’s financial situation is sustained over the long term. That means that today risks in USD-JPY are concentrated at the upper end
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