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FX Update: RBA loosens guidance, JPY rampage continues.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Rather than hiking by more than expected, the RBA took a page from the Powell Fed playbook and loosened up forward guidance to suggest data dependency in determining the timing and size of future rate increases. This shocked the Aussie back lower just after it was threatening key resistance in AUDUSD. Elsewhere, soft US data yesterday took US yields lower and the JPY higher across the board, with the USD also perking up as this latest dip in yields coincides with weaker risk sentiment, in part on concerns for US-China tensions as US House Speaker Pelosi is set to visit Taiwan.


FX Trading focus: RBA: not hawkish looks dovish. JPY rampage continues

I was hoodwinked by the RBA overnight. After the bank went to the extensive trouble recently to describe why households are well positioned to weather a significant tightening of policy and despite record low unemployment and another surge in inflation in one July survey, the RBA felt it was time to downshift the forward guidance on policy into data dependence, very similar in broad strokes to the Powell Fed’s apparent shift in stance at last week’s meeting. For good reason, the market took this as dovish, and the AUD turned tail across the board as the market modestly trimmed forward rate expectations. The relative impact for the AUD is more visible in a pair like AUDNZD, which has dumped over a figure from yesterday’s high and looks set for the most significant setback in quite some time as it will take a considerable dose of incoming data to see a rebuilding of more hawkish policy moves from the RBA relative to the RBNZ, which has already achieved a 2.50% policy rate relative to 1.85% now for the RBA, although the 2-year AU vs. NZ yield spread already peaked out in early July. The AUD also impacted by risk sentiment weakening yesterday.

Elsewhere, besides the important US data through the end of this week (more on that below), we have to get to the other side of Pelosi visit to Taiwan (some 300k are live-tracking her plane on one flight radar tracker I had a look at today, which as of this writing had turned north toward Taiwan after a very eastern track from Singapore). How will China respond after multiple levels of officialdom and the commenting class have made dramatic threats on the intended response?

I have emphasized the importance of the US data this week for next steps in this market, but we also have to consider whether the reaction to US data sees a hint or more of a change in reaction functions. Yesterday saw a possible hint of this as a dip in treasuries coincided with the general weakening of risk sentiment. Recently, the US dollar weakening has been a function of easing financial conditions and falling yields, but if risk sentiment and US yields move sharply in opposite directions (remember when that used to always be the case?), the US dollar may yet switch horses and focus more on the weak risk sentiment side of the equation. As for the data itself, a strong ISM Services survey surprise in either direction is a better test for the market than a payrolls number surprise on Friday, as the payrolls data is some of the most statistically “massaged” data on initial release, even if the market likes to react in knee-jerk fashion to it. If at any point, equity markets stop celebrating weak data (on the lower yields/less Fed tightening implications) and instead fret a hard landing, behavior could see a significant shift with both the JPY and the USD strengthening.

USDJPY has crossed a major level at 131.50, leaving only the psychological 130.00 area ahead of the next major pivot level near 126.50.  Other JPY crosses are heavy as well, AUDJPY very suddenly so after the RBA last night. Any more worrisome outcomes from the US-China situation are likely to have broad regional fall-out in Asia, and particularly into AUD on Australia’s defense alignment with US and Japan, and concerns for Australian exports into China, etc.

Watch out for Fed speakers up today (voters Mester and Bullard as noted on calendar below).

Chart: GBPUSD ahead of the Bank of England
Sterling has received a strong boost off the sub-1.1800 lows on the combination of a strong risk asset performance in July together with sterner Bank of England rhetoric on policy credibility as inflation continues building. With the solid surge in sterling against the euro and especially against the US dollar taking the edge off currency weakness as potential aggravator of further inflation concerns, the Bank of England may indulge in the style of shift we have seen over the last week from the FOMC and RBA, hiking the expected 50 basis points this Thursday but getting cagier on forward guidance, something Governor Bailey and company have tripped over previously. The best combination for a test higher into 1.2500+ is for a further loosening of financial conditions together with solidly hawkish guidance from the BoE that sufficiently contrasts with the non-committal FOMC, while weak risk sentiment is likely the single most important factor for driving a return of downside pressure.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
With the JPY upside acceleration yesterday, the currency is showing powerful momentum, but that could change quickly if strong US data or any other development drives a resurgence in US treasury yields. Elsewhere, note the CNH sympathy with USD direction and the stuffing taken out of both AUD and CAD in the momentum readings as key commodity prices are lower.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
A new downside signal for AUDNZD – this one may blossom into something. Elsewhere, note the EURUSD downtrend just barely hanging in there – likely to tilt more firmly one way or another on the other side of the Friday close if not sooner.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1400 – US Jun. JOLTS Job Openings
  • 1400 – US Fed’s Evans (non-voter) to speak
  • 1700 – US Fed’s Mester (Voter) to speak
  • 2245 – US Fed’s Bullard (Voter) to speak
  • 2245 – New Zealand Q2 Employment Change / Unemployment Rate / Average Hourly Earnings
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