Asia wrap: Wasn't that a dovish FOMC?

Stephen Innes SPI Asset Management

It's somewhat surprising to see the market sit in neutral following Chair Powell's commentary, which leaned towards the dovish side of the equation, especially considering the prevailing hawkish drum beat in recent days.

However, despite this shift, traders remain inflation cautious knowing that another hotter CPI reading could easily bury that last rate cut that markets are desperately holding on to.

Interestingly, some behind-the-scenes discussions suggest that the Fed may have previewed Friday's job data, instilling a greater degree in their confidence that interest rates may have peaked. Not to mention Powell repeated the scenario where a rate cut could be considered if the labor market weakens significantly, even if inflation remains somewhat persistent. Isn't this bullish?

A combination of the Fed dialling back its quantitative tightening and Powell's dovish tone took some of the heat out of USDJPY which opened a better window for the Ministry of Finance (MOF) to intervene. This suggests the beginning of a broader campaign to temper the yen weakness that might even see the Bank of Japan play a policy role.

The recent decline in the dollar has likely prompted some relief at the Bank of Japan and the Ministry of Finance in Tokyo. This decrease in the dollar's value alleviates pressure on the yen, thereby mitigating the necessity for additional yen-buying intervention by Japanese authorities

Regarding the Ministry of Finance's role, they see the same glaring differential disparity between TONA and SOFR everyone does Still, it's noteworthy that they possess significant reserves, enabling them to stabilize currency volatility and buy more time for the JPY to benefit from potential weaknesses in US economic data.

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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