Both the FOMC and Bank of Japan will share the centre stage this week but let us not forget the Australia Q2 CPI, which will be vying for some of the spotlights.
Federal Reserve -Conundrum
The Federal Reserve Board( Feds) capable stage- managed a masterful decline in real US rates in Q2 propelling risk sentiment skyrocketing and providing investors with a post-Brexit buffer. While it’s all but certain, the Feds will hold interest rates on Wednesday, the primary debate centres on Forward Guidance. On the one hand, the Fed may recognise the improving US economic landscape but offer few suggestions regarding policy so as not to topple the post-Brexit apple cart. Given how fragile sentiment is they don’t want to mislead markets and create a gas meets flame scenario that prior FOMC statements have produced. However, they may provide a more even-handed assessment since the immediate Brexit fall out failed to erode market confidence while keeping all options on the table.By imparting a more balanced assessment, Traders would likely view as more hawkish leaning prompting a strong USD reaction as the market prices in a higher probability of December rate hike. As for September, even the most ardent Hawks must concede that with the US elections in November, a September rate hike in is highly unlikely. The hawkish scenario would leave the biggest scope for curve repricing falling on the 2017 -18 calendar where the interest rate curve is extremely flat.
Bank of Japan -The Stage is Set
Bank of Japan( BoJ) expectation is running excessively high as the market has all but convinced themselves that the stage is set for BOJ to drive Risk sentiment forward by cutting rates.Currently, the market is counting on the BoJ to expand its asset purchases from¥ 80 to¥ 90 trillion and reduce it key rate deeper into negative territory to -0.2 percent from -0.1 percent. The tail risk is if the BoJ stands pat this month which would cause a kneejerk risk implosion sending stock prices plummeting while catapulting Yen higher.
Reports are surfacing that there are some dissenters within the BoJ ranks, believing that current policy is adequate to achieve their inflation mandate, but USDJPY continues to grind higher in early trade ignoring the headlines
YEN- Lingering Doubt
Intense speculation continues regarding the size of Japan’s Fiscal Stimulus package with latest headlines suggesting a mega 30 Trillion Yen package is on the table.
While the USDJPY moved convincingly to the 106.25 levels on the headline, it then settled in just above 106 throughout Fridays London and New York sessions.
The cacophony of comments and debate on the so-called “Helicopter Money” narrative has not only tempered USDJPY run up expectations but has also added some level of unwanted confusion to Fridays BoJ decision. Even if the BoJ comes out Guns Blazing and meeting all preliminary market expectations, there is now scope for the disappointment that the Bank of Japan did not take ” all” the necessary steps.
But in the end, it should be the prospects for Japans well signalled massive fiscal stimulus efforts and the more positive US outlook that suggests the USDJPY will remain supported
This morning’s Japanese Trade Data Exports came in lower than expected -7.4% vs 11.4 but exports to major trading partners, US and China lower for the 4th consecutive month.
Australian Dollar-Desperately Seeking Inflation
It was a tough week for the Australian Dollar bulls as rate cut expectations heightened on the back of tepid economic data and the RBA minutes. Not to mention the Strong US economic data has reignited debate of a December US rate hike. However, much of the recent bearish bias is predicted on the result of Q2 CPI, which will likely be the key deciding factor for near-term AUDUSD direction. A print headline print of .4 would validated traders rate cut expectations while weaker headline below .4% would suggest a strong possibility of additional interest rate cuts beyond August are in store before Glen Stevens departure and would likely send the Aussie toppling
Despite the USD strength reemerging on the broader G10 space, the Aussie dollar bounced off .7450 level buffered by positive risk sentiment.
However, the Australian dollar found little reprieve from commodities as Gold Copper, and Oil prices retreated
It’s been a quiet open for the Australian Dollar this morning with few economic headlines over the weekend, and I suspect the next 48 hours will be more about pre-CPI positioning. The Aussie downtrend remains intact amidst broader USD tail winds leading up to this week’s FOMC and the Aussie could be in for a tough slog in the days ahead .
Commodities -DXY Weighs Heavy
While base metals staged a recent recovery on prospects of additional monetary stimulus from China, Copper prices fell under pressure from a stronger USD and rising production in China.
Oil prices remain slippery. Bulging inventories are weighing negatively on prices as fourteen more US oil rigs have come online; a worrisome signal as the inventory builds in the midst of the peak driving season in the USA.
Gold prices have fallen as Brexit concerns ease, and US rate hike expectations rise. When interest rates rise, it becomes more expensive to warehouse gold, and the return diminishes.
Yuan- Modus Operandi
The year’s longest run of weekly losses against the Yuan has ended, with the PBOC reverting to its old tactic of stablising the Yuan with state-owned Bank intervention. This has flamed debate about the mainland’s commitment to permitting market forces to dictate the currency’s peg.
Conspiracy theorists pointed to the proximity of the G-20 meeting as to why the PBOC has drawn a line in the sane for Yuan devaluation at 6.70. This is a concerning move if, as it seems clear, the intention is to kerb capital outflow rather than to position a weaker Yuan to tackle waning exports.
This week will be light for the Yuan, marked by Wednesday’s consumer confidence and industrial profit reports. Unsurprisingly, the PBOC peg came in this morning with a weaker Yuan midpoint setting of 6.6860 vs. 6.6669. USDCNH is powering through 6.6900.
Ringgit -Remains Rocky
The Ringgit should remain vulnerable ahead of this week’s FOMC amid broader USD strength. Also, energy prices remain soft and increasing political risk from 1MDB headlines should continue to weigh on investor sentiment.However, the overall EM Asia space is in a good spot as the chase for yield is expected to resume in this carry happy Global Low-interest rate environment
G-20 -No Smoking Gun
Not unexpectedly BREXIT was the dominate theme for this weekend’s G-20 meeting amidst the rise of antiglobalisation in the west. But overall it concluded with no smoking gun and left Traders will few fires to deal with at this morning Auckland Foreign Exchange market open.