USD Continues to Surge on Fed’s Hawkish Stance

Equities traded mixed yesterday and today in Asia, with the Fed’s hawkish turn having a bigger impact in the FX world. It seems that some investors rushed into adding some stocks to their portfolios, perhaps to take advantage the limited time left for low interest rates. Moving ahead, we prefer to continue paying extra attention to economic data and what officials have to say about when and how fast they expect to start scaling back QE.

Currencies React More Sensitively to the Fed than Equities

The US dollar continued to outperform all but one of the other major currencies. It gained the most against NZD, AUD, and CHF in that order, while it lost some ground only versus JPY.

The strengthening of the US dollar and the Japanese yen, combined with the weakness in the risk-linked Aussie and Kiwi, suggests that financial markets continued to trade in a risk-off environment yesterday and today in Asia. However, turning our gaze to the equity world, we see that major EU and US indices traded mixed, with Nasdaq rising 0.87% and hitting a fresh record high. Sentiment was more upbeat during the Asian session today. Although Japan’s Nikkei 225 slid somewhat, China’s Shanghai Composite, Hong Kong’s Hang Seng and South Korea’s KOSPI traded in the green.

It seems that the hawkish turn by the Fed had a bigger impact in the FX market rather than in equities. Logically, in an environment where the pace for interest-rate increases was brought forth, someone would have expected Nasdaq to underperform notably, as the value of high-growth tech stocks is highly affected by changes in interest rates. Higher interest rates mean lower present values for such firms. Nonetheless, it seems that investors rushed into adding such stocks to their portfolios, perhaps to take advantage of the limited time left for low interest rates.

In any case, with the Fed also initiating a discussion over a potential QE tapering, and noting that the conversations will continue in the months to come and be guided by the pace of the economic recovery, we prefer to keep paying extra attention to the economic data and what Fed officials have to say on the matter. Strong economic data could raise speculation that the Fed may soon decide to start scaling back its bond purchases at a faster pace than previously thought, which combined with remarks by Fed officials that this may be the case, could result in another round of selling in equities. However, taking into account how equities reacted in the aftermath of Wednesday’s decision, we would expect something like that to impact more the currency world. In other words, we would expect the US dollar and other safe-havens to strengthen, and the risk-linked Aussie, Kiwi and Loonie to weaken.

Our preference for taking advantage of such an environment are AUD/USD, NZD/USD, AUD/JPY and NZD/JPY. Despite the latest rally in the Swiss franc, we prefer to leave it out of the equation for now, as yesterday, the SNB kept its policy unchanged and maintained its dovish stance, repeating that the franc remains highly valued and that they are ready to intervene in the FX market when deemed necessary. 

Besides the SNB, we also had a BoJ decision during the Asian session today. The meeting resulted in no fireworks, with officials maintaining their policy unchanged and extending the deadline for pandemic-related programs by six months, as was mainly expected to happen, either at this meeting, either at the next one. The Bank also unveiled a plan to boost funding for fighting climate change, for which it will release a preliminary outline at its next gathering. The yen did not react to the decision, staying mainly driven by the Fed’s hawkish stance.

NZD/JPY – Technical Outlook

NZD/JPY took a deep dive yesterday, pushing further away from the short-term downside resistance line taken from the high of May 27^th. Given the recent strong decline, there is a possibility to see a small correction higher. However, if the pair continues to trade somewhere below that downside line, the path of least resistance could still be to the downside.

If the rate goes ahead and tests the 76.66 hurdle, marked by the lowest point of April, but fail to push below it straight away, a corrective move higher may follow. That said, if NZD/JPY finds resistance near the 77.40 hurdle, marked by the current high of today, or somewhere below the aforementioned downside line, the bears may take charge again and send the pair lower. If this time we see a drop below the 76.66 obstacle, this will confirm a forthcoming lower low and even more sellers could join in. NZD/JPY could then get pushed towards the 76.21 obstacle, a break of which might clear the way to the 75.63 level, marked by the lowest point of March.

Alternatively, in order to examine the upside again, a break of the previously mentioned downside line would be needed. In addition to that, a rate-rise above the 78.59 barrier, marked by yesterday’s high may attract more buyers into the arena. NZD/JPY could travel to the 78.98 hurdle, or to the 79.29 zone, marked by the low of June 1^st and an intraday swing high of June 3^rd. If the buying doesn’t stop there, the next potential target might be at 79.79, or even at 80.18, which is the highest point of May.

GBP/USD – Technical Outlook

GBP/USD continues to feel the heat from the sellers, as the pair is still drifting lower, while trading well below a short-term tentative downside resistance line taken from the high of June 11^th. The RSI and the MACD on our 4-hour chart seem to support the downside scenario for now, as they show negative price momentum. For now, we will take a bearish approach, and continue aiming lower.

If the pair breaks below yesterday’s low, at 1.3891, this will confirm a forthcoming lower low, potentially opening the door for further declines. GBP/USD could then travel to the 1.3838 obstacle, a break of which may allow the bears to drag the rate towards the 1.3800 area. That area is marked near the low of April 30^th.

On the other hand, if the pair gets lifted back above the 1.3970 hurdle, marked by an intraday swing low of June 17^th, that may invite a few bulls back into to field. Such a move might help GBP/USD to go for a larger correction higher, possibly aiming for the 1.4034 obstacle, which if fails to hold and breaks, may send the pair to the 1.4070 level, marked by the low of June 14^th and an intraday swing low of June 15^th. Around there, the rate could also test the aforementioned downside line, which may provide additional resistance.

As for the Rest of Today’s Events

During the early European morning, we already got the UK retail sales for May. Although headline sales missed their forecast, the core rate came in well above its own consensus.

For the rest of the day, the calendar appears relatively light, with no major releases on the agenda.

Disclaimer: