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CFD Markets News and Forecasts — 09-06-2024
Japanese Gross Domestic Product (GDP) for the first quarter (Q1) contracted 0.5% QoQ versus -0.5% expected and -0.5% prior, the Cabinet Office showed on Monday.
Furthermore, the Annualized GDP contracted 1.8% in Q1 versus the expectation of -1.9% and the previous reading of -2.0%.
Market reaction to Japan’s GDP data
Following the Japanese growth numbers, the USD/JPY pair is up 0.06% on the day to trade at 156.85
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
The European Central Bank (ECB) policymaker Robert Holzmann said on Saturday that it is too early to tell whether the ECB has initiated a shift towards lower borrowing costs after it cut its benchmark interest rate at its June meeting last week, per Reuters.
Holzmann further stated that additional ECB rate cuts in the absence of cuts from the US Federal Reserve (Fed) would have an impact on the Euro exchange rate and inflation.
Market reaction
At the time of press, the EUR/USD pair was down 0.23% on the day at 1.0777.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
- AUD/USD weakens near 0.6580 in Friday’s early Asian session.
- The strong US employment data prompted traders to push back the expected timing of Fed rate cuts.
- The RBA’s hawkish stance might support the Aussie and cap the pair’s downside.
The AUD/USD pair remains under some selling pressure around 0.6580 during the early Asian session on Monday. The renewed US Dollar (USD) demand after stronger-than-expected US Nonfarm Payrolls (NFP) data drags the pair lower. The US Consumer Price Index (CPI) for May and the Federal Reserve (Fed) Interest Rate Decision will take center stage this week and might trigger volatility in the market.
The Labor Department showed on Friday that the US economy created far more jobs than expected in May, which dampened the expectation that the US Fed will start cutting interest rates in September. The NFP in the United States climbed 272,000 in May from a 165,000 increase (revised from 175,000) in April and came in above the forecast of 185,000. Additionally. The unemployment Rate ticked up to 4.0% in May from 3.9% in April. The wage inflation, as measured by the Average Hourly Earnings, rose 4.1% YoY in May from 4.0% (revised from 3.9%) in April, above the market consensus of 3.9%.
The strong US employment data might support economic growth and make it less likely that the Fed will lower its borrowing costs anytime soon. This, in turn, might boost the Greenback in the near term and create a headwind for AUD/USD.
On the Aussie front, the hawkish stance from the Reserve Bank of Australia (RBA) might limit the downside for the pair. Last week, RBA Governor Michele Bullock said that the central bank is not expected to deliver rate cuts this year, adding that it is prepared to increase interest rates further if inflation doesn’t return to the target range of 1%–3%.
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