Rate Hike Fever Continues to Grip Markets

Rate Hike Fever Continues to Grip Markets

US rate hike fever continues dominating the Foreign Exchange landscape. The US dollar is trading favourably, despite the next major catalyst, Friday’s Jobs Report. The market is stuck between the good cop, bad cop performance from Yellen and Fischer at Jackson Hole, which likely struck a similar a chord with the majority of Fed policymakers.

 Australian Dollar

The Australian Dollar is trading on a sour note as the broader USD dollar story takes hold. In early trade we are plumbing the .7500 support level.

The repricing of the September Rate hike probabilities is causing discomfort to the long Aussie position as traders continue shifting into ‘sell the rallies’ mode and as 2016 US rate hike expectations increase.

Even the surge in Australia’s July building approvals proved little defense as the Aussie bears swarmed the uptick in price action.

Despite the intense US interest rate chatter, we still have not had a major breakdown, which may be due to the markets perception of an over cautious sitting FOMC, which has proven to have more bark than a bite of late. While the 2016 rate hike is but a certainty, what needs to be ironed out is whether the next interest rate move is a ‘one and done’ deal or a return to the path of interest rate normalisation. If the later, that could be the catalyst for the next big primary USD rally.

Also worth keeping an eye on is the increasing bets for renewed Yuan depreciation and as we’ve seen in the past, this tends to be negative for Risk and the Australian Dollar.

 

Japanese Yen

USDJPY has been grinding higher most of the week, supported by an escalation in both BOJ and Government policy rhetoric.

On the intervention front, officials continue to suggest their readiness to intervene if currency moves are excessive, a comment usually reserved of late for when USDJPY was nearing ¥100.

On the policy front, while rumors of another massive stimulus program fill the airways, to what degree this is, is nothing more than opportunistic lip service, the jury is still out.

The main driver is still the prospect of higher US interest rates.

Confident Consumers moved the USD assuredly higher overnight after the US August consumer confidence index topped estimates, rising sharply higher to 101.1 from 96.7 in July. While not considered one of the Fed’s key metrics, it is, nonetheless, music to their ears and suggests that the US consumer landscape is sufficiently stable enough to support a near-term rate hike. We could see further US strength creep back into play ahead of NFP.

The Nikkei is buoyant in early trade which should also provide a tailwind to USDJPY.

So far we’ve seen limited follow through above ¥103 in APAC on light volumes, which indicates that while traders are willing to kick the can from news event to news event, they are keeping the powder dry for Friday’s NFP fallout.

Yuan 

Yuan depreciation bets are on the rise, which threatens the period of relative calm we’ve had in the RMB complex. However, I expect the PBOC to hover with an Iron Fist to maintain stability through the upcoming G-20. None the fewer, traders appear willing to test the PBOC’s resolve. With the US rate hike probabilities on the rise, expect the Yuan to be one of the significant casualties.

USDASIA

USDASIA is trending, with overall broader US strength, continuing to draw inspiration from the Jackson Hole fallout. Friday’s NFP is a critical event and I would expect positioning to remain light leading up to the high-risk event.