All eyes on Fed as the USD makes a comeback

The main theme in FX markets was further gains in the US dollar as traders continue to pare back USD shorts.

The US dollar index is back above 80 on a slight rise in the probability of December tapering. Solid data in US trade also helped renew taper talk with Chicago PMI and unemployment claims impressing. The mere fact that the Fed has limited concerns about the recent government shutdown and potential for further fiscal drama was enough to result in a sentiment shift.

Traders are paring shorts on the USD and the move above 80 will certainly spook some bears in the short term. The key will be to look out for comments by Fed members as well as jobs numbers. There’s only two big jobs readings left this year and they have to really shoot the lights out before tapering can begin. Evans wanted to see 200k jobs added before starting to taper and were certainly still far from that.

Later today Fed's Bullard, Kocherlakota and Lacker are set to speak and traders will be looking for any hints on tapering. St Louis Fed chief Bullard will be talking on monetary policy while we also get manufacturing PMI data. All these events have the ability to move the greenback, with further gains eyed if the Fed’s tone doesn’t remove the possibility of tapering this year.

AUD under pressure ahead of China data

Risk currency pairs struggled against the greenback, with AUD/USD printing a low of 0.944. There is renewed pressure for the pair with USD strength being the main driver. Locally we have PPI and commodity prices due out. However, it’s all about China today with manufacturing PMI due out at 12:00 AEDST and the market looking for a reading of 51.2. Any disappointment on this front will give traders an excuse to sell the pair further in the near term.

While PMI will be significant, there will be plenty of focus on credit markets. China made headlines yesterday after the PBoC injected 16 billion yuan into the system via reverse repos. This helped interbank rates drop below 5% yesterday and continued stability in the short term will be pivotal for the AUD. The previous range for the pair was 0.93-0.95 and we are back in this range again. I feel the most likely scenario on AUD/USD will be selling into strength, particularly in the 0.95 region.

Big moves in the yen

The BoJ meeting didn’t quite deliver the fireworks experienced from the Fed meeting. As expected, the BoJ retained its existing policy stance. It also raised its GDP growth forecast for FY15 to 1.5% (from 1.3%) and to 1.9% for FY16. While some feel these targets might be a bit too optimistic, others feel it’ll only increase the probability of further stimulus should the run rate for growth fall short, particularly with the upcoming sales tax hike. There is a short term support line running from 28 October which comes in around 98.20. A close below this could lead to an unwind of the speculative longs which had accumulated on USD/JPY.

Uptrend support for USD/JPY

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