Risk-on, US dollar down

Asian stocks extended the global rally on hopes the Federal Reserve (Fed) will stay quiet at the FOMC’s September meeting.

The FTSE opened upbeat as Asia handed over a positive market, yet quickly slipped below the 6900 level. The combination of a stronger pound and cheaper oil could keep the appetite limited in the FTSE, after the index stepped in the overbought market on an hourly basis.

The US dollar is softer across the board following last Friday’s disappointment in the US jobs data. The US economy added 151’000 non-farm jobs in August, versus the 180’000 expected; yet last month’s figures were revised higher from 255’000 to 275’000. The unemployment rate remained stable at 4.9% and the wages growth subdued with 0.1% progress on month, versus 0.3% printed a month ago.

In the aftermath of the US August jobs report, the yen and the antipodeans were the biggest gainers against the US dollar in Asia. As the Federal Reserve (Fed) hawks moved to the sidelines, the probability of a September Fed rate hike fell to 32%, while the odds for a December rate hike remained little changed at around 60%. In summary, September action is basically off the table, while the data will be essential in shaping the expectations for the December meeting.

Based on the post-data market reaction, we suspect that the depressed conditions in the USD market are perhaps not here to stay.

USD/JPY loses support

In Japan, the Bank of Japan (BoJ)’s Governor Kuroda said that new ideas are not off the table as the BoJ is reviewing its monetary policy. As all public services, the monetary policy should take into account the costs and the benefits of its actions, according to Kuroda, and not its limits. Of course, a massive balance sheet expansion, with almost no benefit in terms of inflation and growth, is weighing on the BoJ’s shoulders. As the BoJ runs out of monetary munitions, the fiscal dimension gradually enters the scope, further compromising the Abenomics second arrow – fiscal consolidation.

Nevertheless, investors are expecting a central bank funded fiscal expansion in Japan, as a new policy tool. Good news is that the BoJ shows signs of flexibility to adapt to new policies. Bad news is that the size of a future stimulus package could not suffice to satiate investors’ appetite, as it has often be the case lately.

In the lack of visibility, we could expect a short-term bearish reversal in the USDJPY. The USDJPY is on its way toward the 100-hour moving average, 103.28, after having lost the USD-support. The pair is still considered in the positive trend above 102.71, the major 38.2% retracement on post-Jackson Hole rally. A break below this level should encourage a sell-off toward 102.20/102.15 (major 50% / 200-hour moving average).