US dollar slumps after Summers withdraws

After a subdued session on Friday, currency markets have lit up this morning on the headline Larry Summers has pulled out of contention for the Fed chairman role.

Summers was widely considered as a US dollar bull after having made some throw away comments suggesting he’s not a big fan of QE and was more inclined to employ a tighter monetary policy stance as opposed to other candidates like Janet Yellen. This move leaves current vice chair Yellen as the most likely candidate to take over from Bernanke.

This news has also come in the twilight of trading, so to speak, when liquidity is relatively light. This has resulted in some sharp move across asset classes, particularly driven by a slump in the USD. Key risk currency pairs are testing some key near term resistance levels. AUD/USD traded just shy of $0.94, breaking through last week’s highs in just a moment. GBP/USD came within striking distance of $1.60, having last traded at 1.60 in January. USD/JPY was on the losing end, dropping to a low of ¥98.46 but has since come off those lows to around ¥98.76.

With the USD giving up ground, gold has regained its shine and recovered to around 1,330 early in Asia. Gold bounced off the 50% retracement of the recovery from 1,180 to 1,434, which came in at 1,307. Selling rallies in gold is likely to be the preferred strategy in the near term. There will be limited leads in Asia today with Japan closed in observance of Respect for the Aged Day.

Locally there is nothing major on the calendar today. China only has a 3 day trading week with bank holidays on Thursday and Friday in observance of the mid-autumn festival. Tomorrow we get the RBA’s monetary policy meeting minutes which could shed more light on future rate moves. The brief statement after the rate decision was mostly a carbon copy of the previous months, with the omission of a key phrase on the ‘scope to ease’ being the highlight. Any dovish commentary in the report could result in some AUD profit-taking in the near term. However, there is strong uptrend support and we feel AUD/USD is establishing itself in a new trading range at higher levels.

Of course the key event of the week will be the FOMC meeting where analysts are expecting a token tapering of around $10 billion per month. Emerging markets will also be back in focus with rate decisions for India, South Africa and Turkey. BoJ Gov Kuroda will be on the wires on Thursday and this could result in some yen volatility later in the week.

Later today we have ECB President Mario Draghi on the wires along with CPI and Italian trade balance. This will put the single currency in focus.

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