Euro firms ahead of ECB decision, yen perks up

Euro firms ahead of ECB decision, yen perks up

By Rae Wee

SINGAPORE (Reuters) -The euro firmed a touch on Thursday ahead of a policy decision from the European Central Bank (ECB) where traders consider a rate cut all but certain, while the dollar eased on renewed bets of a U.S. Federal Reserve easing cycle expected this year.

The Canadian dollar edged slightly higher, trimming some losses from the previous session, after the Bank of Canada became the first G7 country to cut its key policy interest rate as widely expected. It was last at C$1.3679 per dollar.

The euro gained 0.17% to $1.0887, as traders looked ahead to the ECB meeting later in the global day for guidance on the central bank’s rate outlook.

While policymakers have telegraphed an intention to lower borrowing costs this month, they have remained reticent on how soon subsequent cuts could come.

“The Governing Council’s rationale will likely be driven by a stronger-than-expected recovery in (business) activity and increased confidence that inflation will return to the targeted level,” said market strategist Henk Potts at Barclays Private Bank.

“Beyond the June meeting, we forecast that we could see quarter-point cuts in September and December.”

In the broader market, the U.S. dollar was on the back foot, weighed in part by easing labour market conditions in the United States which added to the case for Fed rate cuts this year.

Markets have priced in nearly 50 basis points of Fed rate cuts this year, with the first expected to come in September.

Data on Wednesday showed the U.S. services sector switched back into growth mode in May after a short-lived contraction the month before, though details of the survey pointed to employment remaining in contraction territory.

“While new orders suggest continued demand, the selected industry comments and continued employment contraction reveal a touch of caution among service providers,” said economists at Wells Fargo.

Against the U.S. dollar, the kiwi touched a three-month top of $0.6215, while sterling rose 0.05% to $1.2795 and the Aussie edged 0.21% higher to $0.66615.

The dollar index fell 0.11% to 104.14.


Elsewhere, the yen was broadly firmer on the day, edging up 0.2% to 155.78 per dollar.

The Japanese currency had a brief rally earlier in the week as investors unwound positions in yen-funded carry trades, following a strong election victory for Mexico’s ruling party which sparked concern about disputed constitutional reform.

That resulted in a squeeze on long peso/short yen positions, which has been a favourite among carry trades.

In a carry trade, an investor borrows in a currency of a country with low interest rates and invests the proceeds in a higher-yielding currency.

The peso was last 0.2% firmer against the yen, extending its 2.6% gain in the previous session. It had fallen roughly 6% against the Japanese currency at the start of the week, in the wake of Mexico’s election results.

Adding to yen gains were expectations of the Bank of Japan (BOJ) scaling back its massive bond purchases as early as this month, as it works to normalise monetary policy.

BOJ Governor Kazuo Ueda said on Thursday it would be appropriate to reduce the central bank’s bond buying as it moves toward an exit from massive monetary stimulus. His comments come ahead of the BOJ’s two-day monetary policy meeting next week.

“A greater influence was headlines that the BOJ might look to cut back on bond purchases in the June BOJ meeting,” said Chris Weston, head of research at Pepperstone.

“This was almost a momentum play from the Japanese central bank – that is, add in JPY positive news flow when funding currencies – JPY and CHF – were already being covered and bought back, and the result was the JPY rally gaining additional legs,” said Weston.

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