Aussie trade data out this morning, however, showed exports turning negative and trade balance coming in below expectations. This goes to support the case we have been making about the trade terms being a potential negative for AUD compared to NZD. But with RBA rate hike still in play for next week’s meeting, there could still be more upside for AUD. Market is pricing in 50% odds of a rate hike for the November 7 meeting, and more than a full rate hike is priced in by February. This could mean a significant risk for RBA to surprise dovish, while a small upside to delivering hawkish.
Market Takeaway: AUDUSD may have some room for upside as markets absorb Fed’s dovish message, but RBA meeting next week has a high bar to send hawkish signals and structurally AUD remains for downside on trade terms, China underperformance, geopolitical concerns and risks of a global recession.
JPY: Fed takes off the pressure
For now, the Fed has taken off some of the pressure for the Japanese yen after the Bank of Japan managed to surprise dovish again earlier this week. USDJPY rose to 151.50+ as we expected given 150 was no longer the line-in-the-sand, but is now back below 150.50 on Fed’s dovish turn.
From here on, US data will likely remain the key driver of JPY. Any outperformance in jobs data or upside surprises in inflation could still bring USDJPY back towards 152. However, high frequency data suggests that after longer lags, policy tightening may be filtering through the real economy now. If US data starts to show a serious deceleration, there could be an upside potential for the yen, but fundamentals still remain aligned for further yen weakness for now. Treasury yields could still run higher given Fed’s QT and massive Treasury supply, and carry continues to favor a bearish yen view.
Market Takeaway: USDJPY could still go higher to test 152 before the US economic data starts to weaken and Fed rate cut pricing becomes more aggressive.
GBP: BOE on the agenda
Bank of England today will likely try to strike a hawkish tone as services inflation and wages still remain very high, but market is turning its focus to growth headwinds and ability to hiek further for the major central banks remains limited.
Key thing to watch at today’s BOE meeting will be the vote split. One of the members who voted for a rate hike last meeting has since been replaced, and the replacing member is expected to vote with consensus. This shifting vote split towards the dovish side could bring GBP downside. However, GBPUSD has lately seen a high positive correlation to US stocks, and the Fed’s dovish turn may help there. But overall, equities could see downside pressures building amid high rates and mixed earnings, spelling further downside for sterling.