Greenback in focus ahead of the Fed

It seems like we are witnessing the calm before the storm in FX markets, as traders prepare for the most important event of the week. 

Analysts remain split over what the outcome of the meeting will be and this has left a lot of traders on the sidelines, preferring to react to the decision as opposed to pre-empting it. There are a few scenarios that could play out tomorrow, with most analysts in the camp that there won’t be tapering until next year. Should this be the outcome, the Fed could still follow up with a hawkish statement/press conference which essentially sets the market up for tapering in coming months. This I feel would actually be treated as bullish for the greenback and could see risk currencies struggle. A situation where there is no taper and the Fed essentially says it will continue to assess data is likely to result in a drop for the USD and a rally in risk currencies. I feel the market is positioned for a hawkish statement as a minimum, and therefore a cautious tone will only lead to a resumption of the risk rally.

Potential for a ‘token’ taper

One scenario that has been doing the rounds is a token/light taper in the $5 to $15 billion ballpark. This would essentially get the ball rolling on the taper idea and give the Fed an opportunity to start assessing how the market will respond as it gears up for a more significant taper. This scenario will be a tricky play for many, but as long as it is accompanied by a cautious tone then perhaps we could expect it to be business as usual for risk. Essentially I expect to see a binary event from the conclusion of the Fed and this would be a significant driver of the risk on/off trade in Asia tomorrow.

AUD and JPY on the move

There has been some movement in the AUD and JPY in Asia this morning. AUD/USD has actually managed to come off overnight lows in the 0.8882 region and is now trading around 0.892, despite Glenn Stevens continuing to talk the currency lower. The key line in his comments today on the AUD was that anything above 0.90 for AUD/USD is unsuitable. He didn’t quite re-emphasise the 0.85 level he suggested last week, and this has given the AUD some breathing room.

Despite the mild gains in the pair, I still feel moves back towards the 0.90 could be used as an opportunity to sell given the significant amount of offers in that region. August lows in the 0.8848 region could still be tested in the near term.

USD/JPY has bounced off lows in the 102.60 region and looks like it could be headed back to 103 after a disappointing trade balance reading out of Japan. Perhaps some traders feel there could be room to position for USD strength heading into the meeting.

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