- USDJPY testing strong support at 100 and may start heading towards 99.02
- Investors are turning bearish on USDJPY with risk reversal measures moving sharply into negative territory
- Aussie: We remain bearish, although AUD may take advantage of the rising likelihood of Fed staying on the sidelines until next year
The publication of the July FOMC minutes yesterday triggered a USD sell-off in spite of relatively hawkish minutes, which the Fed could move as soon as September. The Federal Reserve left rates unchanged at its last meeting in July against the backdrop of weak economic data. The minutes showed that the Fed is slowly leaning towards raising its benchmark rate but the words and the tone used suggest there is no hurry. In addition, the minutes showed a lack of consensus amongst Fed members that raised concerns about the possibility of an interest rate increase before the end of the year. Indeed, the market is pricing only a 14% likelihood of a hike in September and roughly 30% in December. US equities rose slightly after the publication with the S&P 500 edging up 0.19%, the Down Jones rising 0.12% and the Nasdaq trading flat. The US dollar went under renewed selling pressure with the dollar index falling 0.50%.
The greenback reversed yesterday’s gains against the Japanese yen with USD/JPY falling 0.60% since the publication of the minutes. Since the beginning of the month the currency pair has fallen almost 3% as market participants bet on the inability of the Bank of Japan to weaken the yen. USD/JPY is currently testing the strong support that lies at 100 and may start heading towards the support at 99.02 (low from June 24th). After a period of stabilisation, investors are turning bearish on USD/JPY with risk reversal measures moving sharply into negative territory. The 1-week 25 delta risk reversal eased to 1.9%, while the 1-month one fell to 2.15%, suggesting that investors are buying more downside protection.
Yann Quelenn, market analyst: “BoJ to intervene amid continued dovish stance from Fed?”: The Fed minutes have highlighted the large divide between members on policy normalization. As we have written several times, US debt is far too significant to drive rates higher, as servicing this debt would become too expensive. Instead, this debt needs to killed by strong inflation.
The reason why we believe there will be no rate hike in September and why the stock market is sky rocketing every two days to new highs boils down to this: the dovish stance of the Fed.
The big loser yesterday after the release of the Fed minutes was Japan. The dovish stance of the Fed is pushing the dollar lower and the psychological level of 100 yen for one dollar has been broken once again. The BoJ, which is all-in in terms of accommodative monetary policy, is expected sooner or later to add further stimulus. Markets are definitely pushing the BoJ to intervene again by appreciating the yen. Where will it stop? These kinds of monetary policies have never been experienced in the history of central banks and nobody knows how it will end. But there’s one thing for sure: one ounce of gold has increased by more than 300 hundred dollars since the start of the year.” ---
In Australia, the Aussie got a fresh boost from an encouraging job report. Unemployment fell to 5.7% (versus 5.8% median forecast and previous reading) in July, while the participation rate remained stable at 64.9%. However, we are taking the data with a grain of salt as the gain in employment comes on the back of rising part time employment, which increased by 71.6k jobs, while full time employment fell by 45.4k, suggesting that the economy is not so healthy. AUD/USD returned above the 0.77 level after hitting 0.7610 before the release of the Fed minutes. We remain bearish Aussie, however given the rising likelihood of the Fed staying on the sidelines until next year, the Aussie could take advantage of substantial USD weakness.