Everybody Hates the Fed

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Market Drivers April 5, 2016

Yen strengthens on risk aversion flows
RBA stays on hold
Nikkei -2.42% Dax -2.30%
Oil $35/bbl
Gold $1234/oz.

Europe and Asia:
AUD RBA rates at 2.00%
EUR PMI Composite 53.1 vs. 53.7
GBP PMI Services 53.7 vs. 53.5

North America:
USD Trade Balance 8:30
USD ISM Non-Manufacturing 10:00

Volatility spiked on the second trading day of the week as risk aversion flows and event risk took their toll on all the major crosses.

In Australia the RBA kept rates at 2.00% as expected but the statement showed some frustration with the Fed as Mr. Stevens and company clearly were piqued by the persistent dovishness of Fed policy. In its monthly statement the RBA noted that Australian economy continued to rebalance away from mining and that the recent appreciation in the Aussie was partly due to rise in commodity prices. This was seen by the market as a hawkish sign by the RBA, as officials in Sydney clearly see no reason for any intervention at this point.

However, in pointed reference to the Fed the RBA noted that, “monetary developments elsewhere in the world have also played a role” in keeping Aussie elevated as went on to state that, “Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.” This was an unusual move and shows some discord amongst the G-20 officials as Fed’s dovish stance is creating unwanted appreciation in many major currencies.

The Aussie initially popped higher on the news as the RBA signaled that it will remain stationary with respect to exchange rates for now. Yet officials in Sydney are clearly becoming exasperated by the US monetary policy which is driving carry trade flows into the Aussie and the 8000 level is likely the maginot line for the Aussie after which the RBA may become much more aggressive in its stance to drive exchange rate lower.

As the night progressed however, attention turned to risk aversion flows as decline in equity prices and overall USD/JPY weakness triggered a wave of stop running assaults on the 110.50 level which quickly gave way. The decline in USD/JPY also drove all the high beta currencies lower with Aussie coming off the highs to reverse by nearly a penny.

For a while it looked like USD/JPY could trip the 110.00 barrier and it was only verbal intervention from Chief Cabinet Secretary Suga that propped the pair for time being. Mr. Suga noted that government was watching FX rates with a “sense of urgency” in a clear attempt to halt the drop ahead of the 110.00 figure.

Just as their Australian counterparts Japanese officials are clearly concerned with Fed’s dovish stance which has resulted in USD/JPY coming dangerously close to the 110.00 level. With most of the Japanese corporates hedged near the 115.00 rate the appreciation in the yen is likely to weigh on exports going forward and could wreak havoc with BOJ’s forecasts for both inflation and growth.

Yet despite the frustrations of Japanese officials market sentiment continues to favor lower USD/JPY moves. With yield curves in G-3 continuing to flatten the pressure on the pair remains and if today ISM Non-Manufacturing report misses its mark, it could provide a perfect opportunity for aggressive shorts to take USD/JPY through the 110.00 mark as the day proceeds.

Boris Schlossberg
Managing Director

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