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After opening higher, Japan’s Nikkei has given up ground in choppy trade and has failed to take advantage of the USD recovery. The main theme in the FX space in US trade was a US dollar recovery after having fallen sharply in Asia yesterday on the back of the Larry Summers news.
Some have pinned the recovery in the USD on comments from ex-Fed member Kohn who warned about the risks of keeping extremely easy monetary policy for too long. However, some analysts feel it’s just positioning ahead of the FOMC meeting as some traders book profits on USD shorts heading into the decision.
The fact that the USD gained ground despite disappointing Empire state manufacturing index and industrial production readings is perhaps testament to that. With Mr Summers out of the picture it leaves current vice chair Janet Yellen in pole position for the top job. However, talk that Janet Yellen’s appointment is not a done deal has been mildly supportive of the USD.
The USD recovery has seen USD/JPY bounce off lows below 99 and the pair has stabilised at around 99.25 in Asia. We feel the pair might maintain a fairly tight range until Thursday when the Fed and BoJ Governor Kuroda hit the wires. Apart from Japan, the AUD has been in the limelight today on the back of the RBA minutes from the September meeting. While the RBA remains ready to ease should conditions deteriorate, it has said there is no need for an imminent cut.
Investors were looking for some clarity after the omission of the ‘scope to ease’ phrase in the last statement. However the minutes were as neutral as possible and it’s actually interesting to note that most of the price moves in AUD/USD actually occurred before the minutes were released. Fears that the minutes wouldn't be as hawkish as the market initially interpreted resulted in a bout of profit-taking in the pair today heading into the minutes.
Overall though, the pair has been stuck in a range 0.925 to 0.94 for a week or so and we feel this range might hold heading into the Fed meeting. While the ASX 200 is now a touch higher following the RBA minutes, markets in China are struggling as the short trading week keeps some investors at bay. Chinese markets are closed on Thursday and Friday in observance of the mid-autumn festival.
With Asian markets mostly easing, European markets are positing towards a mildly weaker open. EUR/USD popped higher to 1.338 but has since pulled back to 1.333 as ECB President Mario Draghi continues to sound a cautious tone about the eurozone economy. Mr Draghi was on the wires airing concerns about the fragile economy and high unemployment.
At 19:00 AEST we get the latest ZEW confidence read and once again this survey is expected to improve. Good numbers here could finally see EUR/USD find some support. GBP/USD traded to a high of 1.5963 yesterday on USD weakness caused by Larry Summers stepping out of the race for the Fed chairman role. In UK trade at 18:30 AEST we get the latest inflation read and the market expects a gain of 2.7% on the year, although core inflation is more manageable at +2.1%. A strong number here could push cable through 1.60. Over in the US we get CPI data later while the FOMC meeting commences.
The local market has been relatively flat for most of the session with no dominant theme in place. Nerves have kicked in after we printed a fresh five-year high yesterday and it is clear investors aren’t willing to keep pushing this market higher until we pass a few hurdles on the macroeconomic front. Yesterday we printed a high of 5266, but still struggled to close above this year’s high at 5250. We would still want to see a close above this level before committing to fresh longs.
The financials are holding the market up with gains for ANZ and NAB. However, the miners are weighing on the materials space, with BHP and RIO both in negative territory. Gold names have given up some of yesterday’s gains as the precious metal dropped back towards Friday’s lows. The precious metal is one of the most sensitive assets to US dollar movements and therefore will be in focus as we head into the FOMC meeting. Near-term support is at 1307 which is the 50% retracement of the move from 1180 to 1434.