Central Bankers Take Center Stage

Both the FOMC and Bank of Japan will share the centre stage this week but let us not forget the Austalia Q2 CPI, which will be vying for some of the spotlights.

Federal Reserve -Conundrum 

The Federal Reserve Board( Feds) capably stage- managed a masterful decline in real US rates in Q2  propelling risk sentiment skyrocketing and providing investors with a post-Brexit buffer. While it’s all but certain, the Feds will hold interest rates on Wednesday, the primary debate centres on Forward Guidance. On the one hand, the Fed may recognise the improving US economic landscape but offer few suggestions regarding policy so as not to topple the post-Brexit apple cart.  Given how fragile sentiment is they don’t want to mislead markets and create a gas meets flame scenario that prior FOMC statements have produced. However,  they may provide a more even-handed assessment since the immediate Brexit fall out failed to erode market confidence while keeping all options on the table. By imparting a more balanced assessment, Traders would likely view as more hawkish leaning prompting a strong USD reaction as the market prices in a higher probability of a December rate hike. As for September, even the most ardent  Hawks must concede that with the US elections in November, a September rate hike in is highly unlikely. The hawkish scenario would leave the biggest scope for curve repricing falling on the 2017 -18 calendar where the interest rate curve is extremely flat.

Bank of Japan -The Table’s Set 

Bank of Japan( BoJ) expectation is running excessively high as the market has all but convinced themselves that the stage is set for BOJ to drive Risk sentiment forward by cutting rates.Currently, the market is counting on the BoJ to expand its asset purchases from¥ 80 to¥ 90 trillion and reduce it key rate deeper into negative territory to -0.2 percent from -0.1 percent. The tail risk is if the BoJ stands pat this month which would cause a  kneejerk risk implosion sending stock prices plummeting while catapulting Yen higher.

Reports are surfacing that there are some dissenters within the BoJ ranks, believing that current policy is adequate to achieve their inflation mandate, but USDJPY continues to grind higher in early trade ignoring the headlines

YEN-  Lingering Doubt

Intense speculation continues regarding the size of Japan’s  Fiscal Stimulus package with latest headlines suggesting a mega  30 Trillion  Yen package is on the table.

While the USDJPY moved convincingly to the 106.25 levels on the headline, it then settled in just above 106 throughout the London and New York sessions.

The cacophony of comments and debate on the so-called “Helicopter Money”  narrative has not only tempered  USDJPY run up expectations but has also added some level of unwanted confusion to Fridays  BoJ decision. Even if the BoJ comes out Guns Blazing and meeting all preliminary market expectations, there is now scope for the disappointment that the Bank of Japan did not take ” all” the necessary steps.

But in the end, it should be the prospects for Japans well signalled  massive fiscal stimulus efforts and the more positive US outlook that suggests the USDJPY will remain supported

This morning’s Japanese  Trade Data Exports came in better than expected -7.4% vs-11.4 market consensus,   but exports to major trading partners,  US and China were lower for the 4th consecutive month as exporters struggle with the strengthening Yen.  And while the data is  implying some comfort zone for Japan  policymakers, the print is  unlikely to dissuade from their   current mandate

Australian Dollar-Desperately Seeking Inflation  

It was a tough week for the Australian Dollar bulls as rate cut expectations heightened on the back of tepid economic data and the RBA minutes. Not to mention the Strong US economic data has reignited debate of a December US rate hike. However, much of the recent bearish bias is predicted on the result of Q2 CPI, which will likely be the key deciding factor for near-term AUDUSD direction. A  headline print of .4 would validated traders rate cut expectations while weaker headline below .4% would suggest a strong possibility of additional  interest rate cuts  beyond August are in store before Glen Stevens departure  and would likely send the Aussie toppling

Despite the USD strength reemerging on the broader G10 space, the Aussie dollar bounced off  .7450 level buffered by positive risk sentiment.

However, the Australian  dollar found little reprieve from commodities as Gold  Copper, and Oil prices retreated but currently the Australian dollar sentiment overwhelmingly dictated by the interest rate play as  prospects of policy divergence between  the RBA and the Federal Reserve Board gain momentum

It’s been a quiet open for the Australian Dollar this morning with few economic headlines over the weekend, and I suspect the next 48 hours will be more about pre-CPI positioning. The Aussie downtrend remains intact amidst broader USD tail winds leading up to this week’s FOMC , and the Aussie could be in for a tough slog in the days ahead.

Commodities -DXY Weighs Heavy  

While base metals have recently staged a  recovery on prospects of additional monetary stimulus from China,  Copper prices fell under pressure from a stronger USD and rising production in China.

Oil prices remain slippery as bulging inventories weigh negatively amid fourteen more US oil rigs coming online. A very worrisome signal when you consider the inventory builds while in the midst of peak US driving season.

Gold prices continue falling as Brexit concerns ease, and US rate hike expectations rise on the back of supportive US economic data.When interest rates rise it becomes more expensive to warehouse gold, and the return diminishes.

Yuan- Modus Operandi 

So much for the years longest run of YUAN weekly losses as the Pboc reverted to its old mode of operation stabilising the  Yuan via State-owned bank intervention operations neutralising pressure from the stronger dollar and again flaming debate about mainlands commitment to allowing market forces to dictate the currency peg. The proximity of G-20 to the suspected interventions did little to quell conspiracy theorists as the PBoc has apparently drawn a line in the sand for Yuan devaluation at 6.70, at least for now. I don’t think there’s much debate that the move was to kerb a suspected acceleration of Captial Outflow, despite mainland’s efforts to position the Yuan weaker to tackle the waning export sector. Indeed, a worrisome development if the Pboc feels policy decisions are  boxed in by Outflows pressure

It will be a light week for Mainland data highlighted by Wednesday’s consumer confidence and industrial profit reports.

Ringgit -Remains Rocky 

The Ringgit should remain vulnerable ahead of this week’s FOMC amid broader USD strength. Also, energy prices remain soft and increasing political risk from 1MDB headlines should continue to weigh on investor sentiment.However, the overall EM Asia space  is in a good spot as  the chase for yield is expected to  resume in this carry happy   Global Low-interest  rate environment

G-20 -No Smoking Gun 

Not unexpectedly BREXIT was the dominate theme for this weekend’s G-20  meeting amidst the rise of antiglobalisation in the west. But overall it concluded with no smoking gun and left Traders will few fires to deal with at this morning Auckland Foreign Exchange market open.