Fed RE-Think and Reiterations

Fed Re-Think and Reiterations

The USD sold off for the entire London session, with the catalyst apparently an academic letter by San Francisco Fed President and FOMC member Williams, which was released a day earlier. However, with Fridays soft retail sales report still fresh in Traders’ minds, it did not take much to move markets during a thinly traded August session. With the ” Hawk Goes Dovish” theme still at the front of mind after St Louis Fed’s James Bullard was on the wires Monday expounding similar language, the compounded dovish Fed-Speak further undermined the US Interest Rate Hike Outlook and put the US dollar on immediate defensive.

Moreover, from the “Dove Goes Hawkish”theme,   comments made by influential New York Fed President William Dudley reminded the markets that a September rate hike is possible, adding that US elections will not affect the Fed decision. He believes that the market is under-pricing hike potential and that US 10y yields are “pretty low” given the circumstances.

Atlanta Fed President Dennis Lockhart struck a similar chord, reiterating his view “I am not locked into any policy position at this stage, but if my confidence in the economy proves to be justified, I think at least one increase in the policy rate could be appropriate later this year,”.

However, the USD remained on the defensive as July CPI printed a little weaker than expected overnight. None the less, the handicap odds for a 2016 rate hike coaxed up to just over 50% chance from 45%  earlier

Without stating the obvious, Fed-Speak and   policy obsession will take centre stage in the lead up to the Central Banks rendezvous at Jackson Hole, where Fed Chairperson Yellen will be the keynote speaker

Aussie- Business as usual 

The RBA minutes as a whole failed to have any impact on the currency.Although indicating that recent rate cuts were to promote stronger growth and inflation,  there was no guidance on future policy. The next major wave maker comes with the Australia Employment Report on Thursday

However, the Market  fascination with Fed Williams  ” letter” stole the show overnight and likely triggered the broader dollar weakness, which propelled the Aussie to near the .7750 level as weak US data and dovish Fed Speak prompted a Fed- re-think

Trading Aussie from the short side has been an exercise in futility of late, even in the face of bearish setups

JPY- Testing BoJ Resolve 

The Nikkei has traded poorly overnight, weighing on USDJPY, which set the tone for G10 USD weakness. Of course, everyone loves a good story, and Fed Williams is the flavour du jour, but there are more dynamics in play on USDJPY than a rehashed Fed academic paper.

The BoJ inability to combat the rising yen remains front and centre with the sluggish domestic GDP doing little to reassure investors. Also, add in  weaker USD sentiment as the Fed re-think takes grip and the recipe  for stronger Yen takes shape

The snowball effect started with the technical break of ¥ 100.70-80 levels followed by a   position submission in illiquid markets driving prices to   ¥  .9950 before recovering after some verbal intervention by the Vice Minister of Finance Asakawa.  The sudden move had tongues wagging, and even those who are brushing the move off as a symptom of dwindling liquidity are finding the momentum hard to ignore.

The writing may very well be on the on the wall. Without the Federal Reserve Board doing the heavy lifting( US interest rate hike ) and  with Japanese economy  apparently immune to monetary and fiscal stimulus,  it will take little more  than a few  consecutive session probes below  ¥100 and traders will be hotly  testing the BoJ resolve while knocking on the post-Brexit spot level at ¥99.02

This morning,  Asakawa was dishing out well-worn Japanse Policy Makers verbal intervention ” moves are rough” rhetoric and hinting that the BOJ is in touch with other G-7 sympathetic to Japans cause. Given the market positioning there was some immediate short covering on the news, but as cooler heads prevail, the gap will likely offer nothing more than better level to short USDJPY


 YUAN- QE Bliss

The Yaun continues trading off the back of Broader US dollar weakness and traders will continue to take cues from G-10 movement.

The negative features which weighed on Yuan sentiments   such as mainland growth, RMB complex instability, oil prices and credit concerns, continue to be masked  as risk eases  within  QE dominated  Global Landscape

Shenzhen -Hong Kong connect euphoria, the prospect of more stimulus from PBOC  and relative calm in the RMB complex provides a smoothing reassures to investors and the search for EM yield carry on, lending support to YUAN inflows.


The global QE narrative is providing underlying support to emerging markets with resurgent oil prices adding to the Ringgit appeal. There’s been a bit of reluctance to chase the MYR move due to overhanging political concerns but with the chase for yield in full swing, the MYR should be a clear winner.

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
Stephen Innes

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