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Dovish William Dudley Led Weak USD Foreign Exchange Trading

FX returns vs USD

The USD lost ground against the Japanese Yen and Australian dollar at the onset of the week. On one hand, it was able to gain from foreign exchange trading with EUR. Dollar losses was attributed from the rhetoric made by William Dudley as the New York Fed President confirmed that the US economic data has been too frail to justify tapering along with the pulling effect of coming from the second quarter higher pace in US rates. Meanwhile, the 10yr US yield went lower and tested below 2.70%, although this remained above the 2.67% after the recent FOMC lows.

Foreign exchange trading analysts believe expectations for a slow Fed tapering should permit for accelerating recovery in commodity bloc currencies versus the USD. BNP Paribas is still long position on the AUD/JPY. Inversely, the foreign exchange trading analysts believe that the USD can improve against lower yielding currencies in the eurozone. Japan yen is even higher against the backdrop of a slow and delayed Fed tapering. The broker recommends a sell on the EUR/USD at 1.3510, targetting 1.28 with a stop at 1.3730.

Canadian Dollar Drivers

Foreign exchange trading analysts noted that currencies are still in the stage of recovering from the dovish rhetoric by the Fed and so as pressuring the CAD. The rhetoric likewise weighed on the US 10yr rates. Forecast for consensus estimate looks at a strong 0.6M/M leap in retail sales for July. Hence, foreign exchange trading analysts estimate a modest 0.3% M/M increase. Canadian retail revenues should be consistent with the additional gains made by CAD as short positioning scales back which prevents a positive surprise in US data. The Canadian dollar is the largest in the G10 currencies after JPY based from BNP Paribas’ Positioning Analysis. Technical strategists believe that the main technical support for the USD/CAD will be May to June low of 1.0140. A break beyond that level would send forex signal of a possible pace to 1.0052 lows encountered last May.

Bank of Israel

The Bank of Israel had cut its base rate by 25 bps to 1.0%. The news was noted by economists and it offered little change towards a more dovish outlook. Actually, it was a surprise cut by the Monetary Council. As a result, Barclays economists are well expecting that another 25 bps rate cut awaits in the fourth quarter to about 0.75%. According to these economists, there are few driving factors that will let the Bank of Israel to execute further rate cuts:

(1) The Bank of Israel cut its interest rate forecast to 1.0% in the current year with an expected hike to 1.25% towards the end of 2014.
(2) Lower than expected inflation in August and inflation expectations below the midpoint of the target.
(3) A modest increase in the Bank of Israel growth forecast on concerns over smaller exports and some forex signals of normalisation in consumption.
(4) ILS appreciating value
(5) Fed decision to delay the tapering and constant accommodative global monetary policy
(6) Growth forecast to be subdued.
(7) Soft global commodity price inflation; and
(8)Housing prices will be weighed by prudential regulations.

Broker Comment

The rationale why the Bank of Israel have become dovish is based on several factors. Home inflation will accelerate further and it will not slow down. The acceleration will be caused by additional rate cuts. Growth appears to be softer and yet it is still acceptable to reach its levels at 3.5%, assuming factoring in growth from natural gas. On one hand, growth estimates will only be 2.5% to 3% without factoring in natural gas. The estimated growth levels do not require support from emergency monetary interventions of lowering policy rates that Bank of Israel adopted. However, the Monetary Council has an opposite view and thus it will execute rate cuts accordingly. Furthermore, the presence of the new governor could further stimulate the council’s dovishness.

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