Forex Institutional Research: Commerz Bank FX Daily

Forex Institutional Research: Commerz Bank FX Daily

Key quotes from the Commerz Bank FX report: 

G10 FX Research

USD: Fed Chair Janet Yellen’s desperately expected speech can probably be described as the rhetoric equivalent of the infamous half-full – or half-empty – glass: both the optimists and the pessimists are likely to feel confirmed1 . It is clear which of these two sides the FX market will be taking. Initially EUR-USD eased, then it appreciated and in the end the exchange rate evened out at unchanged levels of 1.1360. That means the USD losses recorded following the labour market report on Friday remain in place. And that despite the fact that Yellen made some veryl positive comments about the labour market. She believes that they are now close to eliminating the slack in the labour market. That is a positive signal following the disappointing data released on Friday, in particular as Yellen explicitly warned against paying too much attention to one single labour market report. However, that was not sufficient for USD-specific gains and rate expectations also remained unchanged. So while Yellen is “cautiously” optimistic the market remains more cautious than optimistic.

That is likely to be mainly due to the fact that Yellen had avoided any reference to the possible timing of the next rate step. A short comment along the lines of “the summer would still be possible” would have been sufficient to give the market an idea. The way things stand the FX market only recognises that in view of the much smaller rise in new jobs in April and May Yellen sees new questions about the economic outlook emerge. And along the lines of “a pessimist is an optimist with experience” the FX market has written the summer off for now (24% likelihood of a rate hike until July). After all only one more labour market report will be published until then and the market fears that based on current knowledge that would not be sufficient for all the Fed’s questions to be answered comprehensively. And as a result the FX market currently sees no reason to assume that the Fed will be in a hurry. If the next rate step does not come until September that fits in quite well with the very slow pace of rate hikes the market is pricing in and as a result there is no reason to trade USD at higher levels right now.

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AUD: As we and the large majority of analysts had expected the Australian central bank (RBA) left its key rate unchanged at 1.75% this morning. So the outlook was what everyone was more interested in. Last month the RBA had lowered its key rate again (in view of a strong AUD) but had not signalled in any way whether it intended to cut rates further or not. Today’s statement draws a (cautiously) more optimistic picture. Inflation is low but principally the Australian economy continues to develop in a promising manner. Unchanged interest rate levels are consistent with sustainable growth and a return to the inflation target. That does not sound as if the RBA will cut rates further. As a result AUD-USD appreciated and breached the 0.74 mark. However, that exactly is the problem: the RBA once again pointed out that AUD appreciation may complicate the adjustment processes of the economy. So if the AUD continues to appreciate the RBA may well think about a rate cut again.

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