Dollar was boosted by the more hawkish than expected FOMC statement. Weaker than expected GDP from US limited dollar's rally. And the greenback lost momentum towards the end of the week as dollar bulls turned cautious ahead of this week's key economic data. Dollar in the end closed the week mixed, up against Euro, Swiss and Aussie but down against other major currencies. Canadian dollar ended the week as the strongest one following the rebound in crude oil prices. Meanwhile, Australian dollar was the weakest one as speculations of further rate cut continued.
To recap some of the key central bank events last week, the October FOMC meeting turned out to be more hawkish than expected. In the accompany statement, the paragraph about concerns over global economic slowdown was removed, signaling the central bank is less worried about global developments. Although a number of Fed presidents have suggested a December rate hike remained on the table, the market expectations appeared to have shifted to a rate hike in 2016. We see the Fed intended to send a more hawkish message in October, so as to influencing market pricing of rate hike in December. The data over the coming 2 months would be critical for determining whether the Fed would begin tightening in December or in first quarter next year. More in Hawkish Fed Raised Hopes Of December Rate Hike.
BoJ kept monetary policies unchanged today despite some speculations of additional stimulus. Interest rate was held near zero while the annual target for monetary base expansion was kept at JPY 80T. Board member Takahide Kiuchi dissented on the decision again and called for a cut in monetary base expansion target to JPY 45T. BoJ governor Haruhiko Kuroda noted in that recovery in Japan remained moderate in spite of slowdown in emerging markets. Meanwhile, he remained optimistic that growth will pick up and exceed potential in fiscal 2015 and 2016. Meanwhile, core inflation is expected to hit the 2% target in second half of fiscal 2016.
RBNZ left the OCR unchanged at 2.75%, following 3 consecutive rate cuts in previous meetings. Policymakers remained cautious over global economic outlook as growth was 'below average' while inflation remained 'low despite highly stimulatory monetary policy'. Policymakers acknowledged the rebound in dairy prices but it's yet to tell whether the strength would sustain. The central bank also noted that strong house prices in Auckland remained a risk to financial stability. It suggested that increased home building would take 'some time' to correct the supply shortfall, despite implementation of the new tax measures and tougher macro-prudential policies. More in RBNZ Hints Further Easing, Warns of Kiwi Strength.
Looking ahead, US economic data will be the major focus this week. While Fed indicated that December rate remained on the table, solid economic data are needed to support the move. And the ISM indices and NFP employment data will decide whether dollar can resume the post FOMC rise. Meanwhile, RBA and BoE will also meet this week. Both are expected to leave policies unchanged. But the accompanying statement would trigger some volatility in the markets.
Regarding trading strategy, we're holding on to AUD/NZD short for the moment. Downside momentum was somewhat limited by oversold condition as seen in daily chart. But it should be noted that there was no strength for rebound even though RBNZ adopted easing bias in last statement. Thus, we believe that risk on the cross remains heavily on the downside. And there is prospect for further decline if RBA sounds more dovish than expected this week. Thus, we'll stay short in AUD/NZD with stop held at 1.0850.
Our EUR/USD short order was not filled as the recovery in the pair was weak before decline resumed. We're maintaining the view that corrective rise from 1.0461 has completed 1.1713 and retest of 1.0461 should be seen sooner or later. But traders would probably need some more time to make up their mind. Hence, we'll maintain a sell on recovery strategy on the pair and will try to sell EUR/USD at 1.1120 this week.