The Winds of Change


Very choppy trading to end the week as the US data dump provided little clarity for Fed watchers while traders are back positioning for an apparent central bank move towards global policy convergence.

The market is smelling the coffee and finally coming to grips that yields should be higher given that central banks are getting ready to drain the trough and some even on the verge of hiking interest rates.

The Winds of Change 

The biggest shift is the Bank of England who will join the rate hike centeral bank fraternity which has turned global fixed income offered. Also, the market has completely ignored the latest NK missile test; it appears traders are viewing these events as little more than posturing and are poised to fade the overreactions. Finally, last weeks higher than expected US CPI gives the Feds the glimmer of inflation required to nudge rates higher. Even if the CPI bump is on the back of the dual hurricanes, price pressure in both housing and gasoline will likely drag on for months ahead.

Given these shifting sentiments, the markets may be erring on too dovish of a Federal Open Market Committee meeting this time around.

Taper Time

FOMC should begin with its much-telegraphed balance sheet reduction, and while not particularly noteworthy in itself; the market reaction to an announcement on the eventual size of the balance sheet is the great unknown. But ultimately draining the economy of cheap money can’t be viewed as a positive for markets accustomed to feeding off central bank largess. Why investors are so complacent is a mystery, but perhaps the reality check will set in midweek.

The market will enter the meeting with 50% probability of a rate hike priced for December, but ultimately investors will focus on the Fed’s inflation forecast and in particular if they have comprehensively overlooked the recent string of weak inflation prints.


Usually, the FOMC decision week is an easy read from a currency traders perspective as markets seldom stray from current midpoints and ranges. But this has been far from your typical pre-meeting build- up with North Korea tension on the simmer, BOE aggressively shifting policy to the hawks nest and US CPI  inflation finally broke the previous string of five consecutive downside surprises.

The BoE hawkish comments have sent waves of policy convergence risk through the markets so traders will continue to estimate the relative pace of monetary policy normalisation in the G10. And while the BoE s policy shift likely dampened the dollar boost from US CPI, there is a chance the dollar does play some catch up this week. However, the Central Bank convergence narrative should remain flowing until after the FOMC meeting.And given the plethora uncertainties, we could see traders taking on minimal risk early in the week.


Difficult to make a meal out of the latest Euro movements. The 1.2000 level remains the seller’s zone while so far low 1.1900’s remain the preferred buy on dip region.So until the next ECB meeting, we could be mired in tight ranges with 1.1875 and 1.2025 providing the bookends

Japanese Yen

Fool me once, shame on you; fool me twice, shame on me. Traders have figured out the North Korea charade and are looking to buy the USDJPY dip on escalation. Also, last weeks perky US CPI data has some traders changing their conviction on December rate hike. As the market continues to focus on surging yields a push through 111.25-50 resistance would seem likely. If not for the FOMC uncertainly we’re likely only one strong US economic data print away from a push to 112.00

In what could be a risky move Japanese Prime Minister Shinzo Abe is considering calling a snap election as early as October. Keep in mind, we saw a similar move fail famously in the UK, so this does not come without considerable risk. However,  one has to wonder about the timing given the NK escalation but none the less,  there you have it.

As for the BoJ meeting this week, I’m not viewing any shift from the BoJ unconventional policy stance, but given much of the current  policy committee members were  elected by the Abe administration, there will be heightened focus on the election rhetoric

The Australian Dollar

The RBA is making every excuse it can to talk the Aussie down, and with other G-10 Central Banks moving towards policy convergence with the US and given the RBA looks happy to sit out the central bank taper, one would expect the AUD to struggle to hold onto its current posture over the medium term. On Tuesday, the Reserve Bank of Australia minutes are released which will be of interest to AUDUSD traders but given that much of the bigger Aussie movements have come on the back of external drivers, it’s difficult to imagine the minutes having too much of a punch ahead of the FOMC.

New Zealand Dollar

Friday, Kiwi traders will be sidelined awaiting the results of the following day’s election. The National Party and Labour Party are virtually tied in polls which is creating a bit of rollercoaster whipsawing back on forth on the polls as Labour victory means an RBNZ overhaul suggesting policy will be decided by a committee that would include external members, rather than the governor as lone decision maker.

Chinese Yuan

China economic data does not have the punch it used to have on the global markets, and this is likely a reflection of the more stable RMB.

The Pboc have worked their way into a happy place where policy mechanism can pass through USD movements in more balanced manner. Over the near term, stability will be the primary focus for administrators particularly over the Party Congress,



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