© Jignesh Davda
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There has been a good indication of the psychological 100.00 level holding in USD/JPY and recent Bank of Japan communication indicates a strong commitment from the Central bank to ease monetary policy as necessary. Between recent technical developments and the measures already implemented by the BoJ, there is good upside potential in the pair over the medium term. The US election stands to spark demand for safe haven assets which can curb gains in the near term. Declines towards 103.50-104.00 should be well supported as the pair makes its way to the 105.00-106.00 area.
Taking into account the highly volatile oil market, what are your forecasts for the commodity-linked currencies i.e. the Aussie, the Kiwi and the Loonie by the end of this year?
Oil prices are influenced by ongoing OPEC talks over a production freeze and will likely remain bid until the next meeting in November. Further clarity as to whether planned changes to oil output will materialize will determine trends in oil. The once strong correlation between oil and commodity currencies has been diverging, especially with the Canadian currency. The Alberta Wildfires initially caused a divergence in May and following the September 28 OPEC meeting ,the correlation is once again seen widening. With the US Dollar dominating the majors since the start of the month, there is some expectation for this divergence to continue, with a view of a 6-7% correction in commodity currencies against the Greenback by the end of the year.
What will be the main drivers (other than oil) that will determine the future performance of the above mentioned currencies?
The anticipated December rate hike from the Federal Reserve will be a big driver in the financial markets. Central banks from the three commodity currencies have eased monetary policy earlier this year, but their efforts have not provided the desired effect. With the Dollar weakening in the first half of the year, commodity currencies have been boosted in the search of yield. A stronger Dollar would negate this sentiment. As the Dollar is starting to gain some ground, Central banks outside the United States may take advantage, as further easing during this time can cause a depreciation of their currencies, which they have been seeking.