Certain about Uncertainty

Certain about Uncertainty 

Overnight, US economic data disappointed as retail sales fell for second consecutive month, nudging the December US interest rate hike probability to fall below 50%. The focus now shifts to tonight CPI which could have a significant impact on rate hike expectations, even more so in the wake of the tepid Retails Sales print. A benign inflation print will likely reverse much of the recent yield curve damage and put the USD on the defensive. The Atlanta Fed GDPNow indicator plumbed to only 3% from 3.3% Sept 9.

  Japanese Yen

The market looks as if it is giving up on the long USDJPY as US economic data points south, and with a minuscule chance the BOJ will reach a mandate consensus from their policy review, it would suggest that downside risk is gaining favor. The bar is always high for the BOJ and traders are now distressed over an another headline that the BOJ is split over the mechanisms for providing additional stimulus. But given the BOJ’s penchant for a surprise, the only certainly is to expect more uncertainty in the build-up to next week’s BOJ meeting. Indeed, the market is more anxious about the BOJ decision rather than the Fed decision, which at this stage is all but priced out for a September rate hike. There’s a growing consensus that the BOJ will refrain from moving deeper into NIRP this meeting, but will keep all options open for November and will forward guide that choice at next week’s meeting. There’s a severe lack of confidence over BOJ policy brewing this morning.

Coupled with the lack of confidence in the BOJ and with the Feds likely sitting tight due to political uncertainty regarding the US presidential election, USDJPY is very vulnerable, which brings intervention options back to the fore.

Australian Dollar 

Yesterday’s domestic data had little influence on price action and while we should have expected some downside follow through on the mixed domestic employment data, with risk stabilizing, the recent sell-off ran out of gas as the AUD found near term support. Last night, disappointing US economic data propelled the AUDUSD through .7515 as carry trade momentum picked up with the September US rate hike probability dropped to 12% and December moved below 50% for the first time since the “lollygagger” of hawkish Fed Speak filled the airwaves last week.

Also, as US election polls suggest Donald Trump is gaining momentum, with heightened political uncertainty it plays into the notion the Feds will remain lower for longer,  underpinning the Australian Dollar.

Regardless, I expect commodity currencies to trade heavy, but the Carry Aspect for the Aussie will likely take its cue from tonight’s US CPI print.


If there was any doubt that the PBOC iron hand was taking hold, with the release of the PBOC Yuan positions, foreign currency holdings plummeted to its lowest level since August 2011, which indicates that the PBOC was active selling USD in defense of the Yuan.

Apparently, this overt intervention is designed to keep the Yuan on an even keel before the SDR inclusion. Holiday thinned trading conditions are keeping traders sidelined, even more so ahead of next week’s crucial Central Bank meetings.

The Ringgit had a respite from positive bond flow and weaker US economic data but is still carrying the burden from plummeting oil prices

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