3 May 2016
USD remains defensive but may stabilize soon - BNPP
Research Team at BNP Paribas, notes that the USD has extended losses in the aftermath of last week’s FOMC meeting, with a below consensus reading on the manufacturing ISM headline adding more credence to Fed concerns about slowing activity.
Key Quotes
“The ISM manufacturing index fell back to 50.8 after jumping to 51.8 from 49.5 last month. The data suggests that any benefit the US manufacturing outlook got from the retreat in the USD is now being offset by other headwinds.
Against this backdrop, EURUSD reached new post August highs of 1.1535, while USDJPY tested to new post October 2014 lows around 106.14. USDJPY is now well-through our Q2 end forecast of 108, while EURUSD is rapidly closing in on our 1.16 target for that pair.
We remain long EURUSD targeting that level but we would be cautious of chasing USD weakness much further. Notably, even after the weaker data, US front-end rates were little changed, suggesting that rates markets may have reached an equilibrium low level of Fed pricing and nominal rates may not fall much further.
Moreover, we are increasingly at levels were other policy makers may begin to object. Speaking on Monday from Frankfurt on the eve of a three-day Japanese holiday, BOJ Governor Kuroda warned that the yen’s gains may hurt the economy and the BOJ won’t hesitate to act if needed. ECB council member Lautenschlaeger noted that the ECB is not out of ammunition, although she also indicated it is not yet time to consider additional measures.”
Key Quotes
“The ISM manufacturing index fell back to 50.8 after jumping to 51.8 from 49.5 last month. The data suggests that any benefit the US manufacturing outlook got from the retreat in the USD is now being offset by other headwinds.
Against this backdrop, EURUSD reached new post August highs of 1.1535, while USDJPY tested to new post October 2014 lows around 106.14. USDJPY is now well-through our Q2 end forecast of 108, while EURUSD is rapidly closing in on our 1.16 target for that pair.
We remain long EURUSD targeting that level but we would be cautious of chasing USD weakness much further. Notably, even after the weaker data, US front-end rates were little changed, suggesting that rates markets may have reached an equilibrium low level of Fed pricing and nominal rates may not fall much further.
Moreover, we are increasingly at levels were other policy makers may begin to object. Speaking on Monday from Frankfurt on the eve of a three-day Japanese holiday, BOJ Governor Kuroda warned that the yen’s gains may hurt the economy and the BOJ won’t hesitate to act if needed. ECB council member Lautenschlaeger noted that the ECB is not out of ammunition, although she also indicated it is not yet time to consider additional measures.”