Certain about Uncertainty
Last night US economic data disappointed as retail sales fell for second consecutive month nudging the December US interest rate hike probably below 50 %. The focus now shifts to tonight’s US CPI which could have a significant impact on rate hike expectations, even more so in the wake of the tepid Retails Sales print. A benign inflation print will likely reverse much of the recent yield curve damage and put the USD on the defensive.
Japanese Yen
The market looks like giving up on the long USDJPY as US economic data points south and with a minuscule chance the BOJ will reach a mandate consensus from their policy review, it would suggest that downside risk is gaining favor. The Bar is always high for the BOJ and traders are now distressed over an additional headline that the BOJ is split over the mechanisms for providing additional stimulus. But given the BoJ penchant for a surprise the only certainly is to expect more uncertainty in the build-up to next week’s BOJ meeting. Indeed, the market is more anxious about the BOJ rather than the Fed decision, which at this stage is all but priced out for a September rate hike. Staying with the BoJ, there’s a growing consensus that the BoJ will refrain from moving deeper into NIRP this meeting, but will keep all option open for November and will forward guide that choice at next week’s meeting. But in general, there’s a severe lack of confidence over BoJ policy brewing this morning.
Couple the lack of confidence in BOJ and the Feds likely sitting tight due to political uncertainty regarding the US presidential election, USDJPY is very vulnerable which brings intervention options back to the fore.
Australian Dollar
Yesterdays Domestic data had little influence on price action and while we should have expected some downside follow through on the mixed domestic employment data, with risk stabilizing the recent sell-off ran out of gas as the Aussie found near term support. Last night disappointing US economic data propelled the AUDUSD through .7515 as carry trade momentum picked up with the September US rate hike probability dropped to 12 % and December moved below 50 % for the first time since the “lollygagger” of Hawkish Fed Speak filled the airwaves last week.
Also, with the US election polls suggesting Donald Trump is gaining momentum, with heightened political uncertainty it plays into the notion the Feds will remain lower for longer, underpinning the Australian Dollar
Regardless, I expect commodity and risk currencies to trade top heavy as Central Bank policy get’s ironed out , but the short-term Carry Aspect for the Aussie will likely take its cue from tonight’s US CPI print
Yuan
If there was any doubt that the Pboc Iron hand was taking hold, the release of the Pboc yuan positions, foreign currency holdings plummeted to the lower level since August 2011 indicating the Pboc was active selling USD in defense of the yuan. Apparently, this overt intervention is designed to keep the Yaun on an even keel before the SDR inclusion. Holiday thinned trading conditions are keeping traders sidelined, even more so ahead of next week’s crucial Central Bank meeting.
Ringgit
The Ringgit had a respite from positive bond flow and weaker US economic data but is still carrying the burden from plummeting oil prices
