As expected, Lael Brainard set the pace for the NY trading session but held true to her dovish roots hitting on moderate inflation, EM market Risk, and Employment slack as the primary case for a cautionary Fed tack. And while Kashkari also waxed dovish, Lockhart, on the other hand, was steadfast that meaningful discussion on a US rate hike is necessary at the next FOMC despite the recent run of cooler US economic data
AS some semblance of stability returned to capital markets, risk on took hold and the Carry Trade unwind ground to a halt with the Australian Dollar bouncing modestly off overnight lows
While Brainard’s dovish tones and very convincing arguments have some USD bull’s trimming positions, by no means has this cleared up the Global Monetary Policy debate as uncertainty continues to reign supreme in that regard.
Given the fact, this sense of calm could be little more than the eye of the storm. It’s very unlikely traders will be willing to drop their guard so quickly. With the recent massive sell-off in global equities still fresh in mind, I suspect traders will be looking to pounce at the slightest hint of risk aversion leaving both the Australian and New Zealand dollar vulnerable. Unfortunately for the BoJ, the Japanese Yen will likely be the beneficiary of the risk off moves as G-3 currencies appear to be the favorite security blankets amidst this recent mini” taper tantrum.”
The Yen plot continues to thicken as USDJPY remains under pressure defensively positioned for another wave of risk aversion. Concerns emanating from reports that Japans pensions are cutting back on their exposure to equities due to low returns have traders guarded And while the pair continues trading within a broad 101-103 range, it should remain supported from both the likelihood of BoJ to increase stimulus in some form or another and the Federal Reserve Board which could still make September FOMC a policy pivot meeting
AS this G-3 Central Bank ” Game of Thrones ” unfolds I think that Forex may be driven short term by equity and bond markets movement amidst the broader risk aversion play. We’re likely in for a couple of bumpy weeks.