Currency Traders Seem Confused On Thursday Morning

Asian currencies are trading mixed this morning as forex traders are looking towards the Bank of England “Super Thursday” and tomorrow’s nonfarm payroll report. Focus remains tuned into every the possibilities of the Federal Reserve interest rate increase either in September or December. It seems that everyone is asking the same question “How Will This Effect The Fed Decision?” Traders are bolstering bets the Federal Reserve will raise interest rates before the year is out as the economy appears firmly in recovery mode. Interest-rate futures showed the chances of a Federal Reserve rate increase next month reached 48 percent Thursday, up from 38 percent earlier this week.

The Aussie tumbled this morning after a mixed employment data reports.  The market isn’t quite sure how to view Australia’s labour market report for July, as a surprisingly large jump in the unemployment rate competes with encouraging jobs growth and a growing labour force set against lower than expected population growth. The unemployment rate jumped to 6.3% from a revised 6.1%, which is a far cry from the 6.1% the market was expecting, and the economy added an impressive 38.5K jobs over the month. The Aussie fell to 0.7332 giving up 24 points.

Across the ocean the tiny island of New Zealand saw its currency move in the opposite direction with the kiwi climbing to 0.6542 adding 29 points. The kiwi has also been under pressure as slumping global milk prices prompted the Reserve Bank to embark on looser monetary policy in June, and this week’s latest decline caused local economists to downgrade their expectations for Fonterra Cooperative Group’s forecast payout to farmers to below $4 per kilogram of milk solids.

Also in the Asian theater the Japanese yen gained against the dollar and the euro as traders begin to anticipate the Bank of Japan decision tomorrow. There was no data from Japan this morning.  The USDJPY dipped 14 points from its recent high to trade at 124.73 as the US dollar remained near recent highs at 97.90. The euro traded at 136.08 against the yen. Investors continued to review the situation in Greece weighing on the euro as the Greek stock markets continues to fall and Greek bank stocks hit rock bottoms.

The Japanese yen is trading at multi-year lows versus the US dollar and sterling. Its depreciation has been more pronounced over the past year, spurred by the Bank of Japan’s (BoJ) additional stimulus in October 2014, when the central bank surprised the market by announcing an expansion of its asset purchase program to an annual pace of 80 trillion yen.  The market has been skeptical for good reasons. Japan’s economy has struggled to make meaningful improvements since it bounced back from recession late last year, leading the BoJ to push back the timeframe of meeting its inflation target from the fiscal year 2015 to 2016.

With additional BoJ stimulus unlikely in the foreseeable future, we believe that the trend of yen weakness, which has been closely aligned to the central bank’s quantitative and qualitative easing policies, has run its course in the near term. Financial Times this morning offered this interesting graphic that I decided to share with you.