Seeking Policy Direction

Dr Yellen’s Speech 

On the surface Dr. Yellen’s speech could be construed that the Fed is exploring new excuses to keep interest rates lower for longer., hinting economy has “a little more room to run” than previously thought.  But more likely a tactic to calm markets as we draw closer to a very devise US political election

Despite the” lower of longer “rhetoric, the expected case for a  December hike remains on the course, but given the division in the FOMC,  it’s far from a done deal. While recent US economic data, specifically the employment metric, runs hot, a few bruises in the data between now and  December can easily tip the apple cart.

And while inflation is gradually picking up in the US, the Fed’s preferred measure, the core  PCE inflation,  is currently running at a tepid  1.6 percent, and well below the Fed’s 2 percent target. While this fact should minimally  impact  the case for  December hike, it could affect the pace of rate hikes in 2017 and beyond.

Remember the Fed has a dual mandate to maintain not only full employment  but also a sustainable rate of inflation

Australian Dollar 

The Australian dollar remains remarkably hardy.  After hitting technical support levels following last week’s weaker Chinese trade data, the high beta currency  rebounded resoundingly despite the stronger USD. While Trader’s  pointed to both OIL and Commodity prices as the primary catalyst, let’s not overlook  AUD Short-term interest rate  curve  which  is pricing less than 50% chance of another rate cut., the lowest betting odds  since May last year

In the oil patch, WTI has been on a steady uptrend since the middle of last month on the back of OPEC production cut and a heavy dose of moral suasion from  OPEC members. But OIL prices gained immense traction on October 10 when Russia’s President Vladimir Putin agreed to join the movement  By all accounts, between now and November the street while continue to buy into OPEC  production cut mantra despite the fact that production level remains high and global demand dwindles.  Even Fridays Baker Hughes report which showed four more rigs came online failed to dent market bull sentiment despite the obvious fact more production is in the offing.

Also, the recent commodity splurge by China loading up on  Coal and Iron ore, despite lingering economic concerns,  likely underpinned  the Aussie   appeal

I guess the big question for the commodity basket of currencies which are trading on the heels of risk sensitivity, will the current risk rally continue especially with last weeks horrible China Trade Data still lingering.

So far in early trade, the Aussie is trading below .7600 but remains supported on dips.

Next up on the domestic front is the RBA meeting minutes on OCT 18 which should attract some attention given its Governor Lowe’s first meeting, but realistically it’s unlikely the RBA will detour from their  ” near neutral stance.”

Japanese Yen 

The Yen should continue to trade on the back of the US economic cycle with interest rates and equities the primary driver. With all the Fed verbal gymnastics in the background, it’s becoming clear that the market is waiting for some constructive policy direction from the Feds. So the USDJPY may become somewhat of a sideshow in the days to come as the Fed tries to keep the market contained through moral suasion ahead of a very divisive US election.

Chinese Yuan 

The Yuan faces considerable headwinds as we enter the final months of 2016. Steeper Yield Curves in the G-3 currencies will weigh on the Yuan, which could struggle against broader USD positive moves as we approach the December lift off. The China PPI reading on Friday provided a supportive lifeline to global risk, yet the weak global economic climate and abysmal Chinese trade data could continue to add to market unease. While it’s unlikely, the RMB could experience a sudden bout of large depreciation. Traders are treading water with trepidation.

Malaysian Ringgit

The MYR is reeling from Bank Negara data, which showed substantial sell-off of Malaysian bonds by foreign investors in September. This week’s budget could offer a lifeline by providing some additional economic boosts to the economy. However, the budget is more likely, given that there could be an early 2017 election, to see Prime Minister Datuk Seri Najib Abdul Razak walk the thin line between fiscal prudence and appealing to voters. One possibility is for a reduction in Corporate Income Tax rates so as to stay in line with recently proposed cuts in both the Philippines and Indonesia, which would be perceived favorably by the markets, despite the fact CIT rates are quite moderate.


Thailand is still dealing with the distinctive storyline from the death of the highly revered King Bhumibol Adulyade. Political uncertainty is sure to pick up, as tensions could escalate between the Yellow and Red Shirts. In the meantime, the Thai market remains on solid footing and is considerably underweight from a foreign investment perspective, in both bonds and equities. If political noise can stay low, the markets should hold on to last week’s rebound.

last week’s rebound.

Stephen Innes

Stephen Innes

Senior Currency Trader and Analyst at OANDA
Stephen has over 25 years of experience in the financial markets and specializes in Asian currencies at OANDA. After having started his trading career with NatWest Bank, he is currently based in Singapore as a Senior Currency Trader and Analyst with OANDA, focusing on the movement of the Aussie Dollar and ASEAN Currencies. Stephen has an extensive trading experience in Interest Rate Futures, Money Markets and Precious Metals. Prior to joining OANDA, he worked with organizations like Cambridge Mercantile, Nat West, Garvin Guy Butler, Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes
Stephen Innes

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