BoJ eyed with USD likely to remain on the back foot - Westpac

Sean Callow, suggests that the most eye-catching move in FX this week was the tumble in the US dollar after the strikingly weak US non-manufacturing ISM survey for August.

Key Quotes

“Weakness in such a broad-ranging survey was seen as a serious blow to the prospects of a Fed hike on 21 Sep. Pricing for a rate rise is down to just 15% (CME estimate).

We expect the US dollar to remain on the back foot in the week ahead, with US data surprises tilting to the downside. Pricing for a Fed hike in both Sep and Dec should continue to fade. This should support a range of currencies, with EUR/USD re-targeting 1.15 multi-week and both AUD and NZD likely to remain among the better performers given their yield pickup. All G10 currencies are up against USD over the past week but the top 4 are NZD, NOK, CAD and AUD. AUD/USD should re-test the August highs around 0.7750/60.

Low-yielding yen, retaining its title as easily the strongest currency so far over 2016, up 18%. Confusion reigns over the Bank of Japan’s decision on 21 Sep (yes, just hours ahead of the FOMC).

Governor Kuroda this week discussed the various policy options. He insisted that a reduction in monetary stimulus “will not be considered” but left open whether he was leaning towards lowering the deposit rate from -0.1%, increasing the pace of money base expansion from JPY80trn ($785bn) p.a. or changing the mix of assets purchased.

The yield on 10 year Japanese government bonds fell steeply after the Jan BoJ meeting where negative rates were announced but bounced after the July decision not to buy more JGBs. Indeed the price action in JGBs has been nasty at times, Bloomberg TV deeming it a “quiet riot” as most eyes remain on the Fed. Local reports indicate deep divisions at the BoJ over the Sep decision. Another negative market reaction could have spillover effects to risk appetite – a factor tempering our multi-week optimism on AUD/USD.”