With the likelihood of a June rate hike running about a 50/50, the USD has continued to gain momentum after Thursday’s FOMC minutes release. US equity markets have weakened as investors factor in increased US rate hike expectations for June/July.  Of local concern, the Nikkei is holding its own on the back of a weakening yen.


YEN – hints of easing policy (again)


In Japan, we had consecutive top side data surprises with a notable upside with core machinery orders rising 5.5% month-on-month in March. Further hints of easing from Kuroda have temporarily propelled USDJPY above 110.00. The Bank of Japan Governor hit the wires acknowledging that the central bank would not hesitate to unleash an aggressive monetary easing package to achieve the 2% inflation target. The market is now considering the upcoming Upper House elections in July giving rise to the real possibility that the BoJ may adopt a more aggressive policy easing stance at the next June meeting.


Coming on the heels of an apparently hawkish FOMC, the increased risk of additional monetary policy divergence between BoJ and the Fed as early as June should keep the USDJPY supported in the near term.

The Aussie – under pressure


The primary focus is that the Aussie dollar closed below some critical levels, in particular, the 200 days moving average (0.7259) and while the pair briefly tested the 0.7200 level, it ran into considerable resistance. The Aussie has come under considerable pressure in the wake of the hawkish FOMC minutes, coupled with lower-than-expected wage index. Also, add into the mix yesterday’s weaker-than-expected employment data. However, the bigger risk for the Aussie will likely come from the repricing. The more significant signal for AUD will come from any further re-pricing of the Fed curves and the pressure a stronger USD will have on USD/ASIAN basket, along with built-in pressure a stronger dollar will have on commodity prices. While it doesn’t paint a very rosy outlook for the Aussie, we should remain cognisant that 0.71-0.72 levels back in February proved to be extremely firm support levels when the Aussie outlook was equally bleak.


Choppy markets ahead


After the release of the April FOMC minutes, traders will be paying close attention to voting Fed members in the lead-up to the FOMC’s 16 June decision. So we should expect some choppy markets ahead. We’ve been down this road before so I expect markets to remain incredibly unsettled in the weeks leading up the US FOMC, as the Fed will likely gauge not only domestic US data but also factor in China’s response as well as equity markets in their June decision.



Yuan – capital outflows could speed up

Increased prospects of a June Fed hike continue to weigh negatively. The hawkish tone from the Fed minutes no only increased the odds of a June rate hike but increases the chances that we could see two, or even three rate hikes, this year. But the additional concern is the pressure the Fed hike will have on domestic equity markets while will likely accelerate CNH depreciation in offshore markets as capital outflows rise.

While there has been a slowdown in outflows of late, the primary reason is that the fact the Fed has been cautious to move interest rates higher. If the US central bank was to accelerate the interest rate hike cycle, capital outflows would speed up and be a real concern for global markets and risk aversion in general.

With The Chinese economy continuing to struggle, coupled with the prospect of higher US interest rates, we should anticipate further weakness in the Yuan over the short term.


MYR – trading to remain uneasy


Happy days in emerging markets and the USD/ASIA basket could be coming to an end. The heightened expectations of US interest rate hikes have dampened the EM party and should continue to weigh negatively on the Ringgit. Also, the natural correction in commodities on the back of a stronger dollar should also weigh negatively on regional markets and MYR.
We should expect trading to remain uneasy as investors come to grips with shifting Fed policy and the ensuing fallout. Bank Negara Malaysia (BNM) left its overnight policy rate (OPR) at 3.25%, as widely expected. “At the current level of the OPR, the stance of monetary policy is accommodative and supportive of economic activity,” the central bank said in a statement. With economic growth continuing to stabilise, there is no need for the BNM to add additional stimulus.


This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes