Given this, many were surprised to see the Aussie dollar spike up 0.5% overnight because of the downside risk potential today. The big story in FX markets is the rally in the Japanese yen as traders spat the dummy after seeing leaked reports in the press showing a much smaller than expected fiscal stimulus package in Japan. Japan’s Finance Minister Taro Aso spoke yesterday and stated that the government had not decided on the exact size of the fiscal stimulus package yet, which seemed to only aggravate investor concerns as the yen strengthened 1.1% overnight - its biggest one day strengthening since Brexit. An optimistic cynic could argue that reflationistas within the Japanese government may have leaked the low ball fiscal stimulus figure to the Nikkei newsagency precisely to evoke a negative reaction in the yen so as to give them a mandate to push for a bigger fiscal stimulus package. Because it’s hard to see the Japanese government being happy to continue with the status quo.
Some of this yen strength may also have contributed to US dollar weakness as well as some long USD traders taking some profits off the table before the uncertainty of the Fed meeting. The pullback in the USD has also provided a fillip to commodities and commodity related currencies such as the Aussie.
A lot of the US dollar decline was trimmed later in the session after the release of stronger-than-expected US new home sales data. New home sales in the US surged to 25.4% year-on-year growth in June – the fastest rate of growth seen since February 2015. The rest of the US data was a bit more mixed with US house prices and Markit’s Services PMI coming in slightly below expectations.
The pound dropped sharply overnight after BOE committee member Martin Weale, who is traditionally regarded as a hawk, came out sharply in favour of rate cuts following the dramatic fall in UK flash PMIs. Although much of these losses were trimmed, partly helped by the weakness in the USD. But the British Bankers’ Association showed home loan growth saw a big 4.2% month-on-month decline in June, another negative economic data point for the UK.
The threat of the European banking stress tests reports expected on Friday began to weigh on German banks overnight as well the Italian banks. Commerzbank lost 6.7% and Deutsche Bank lost close to 5%, but just to make sure people didn’t forget about Italy too, Banca Monte dei Paschi di Siena promptly lost 8.7% and saw trading suspended for good measure.
Most Asian markets look set to open cautiously higher with the relatively positive lead-in from overnight markets. The weakness in the US dollar will be welcomed by the down beaten materials sector and the gains seen in copper and iron ore overnight should also help mining stocks today. CBA and BHP’s ADRs saw solid gains in the US session. And despite the strengthening of the yen, even the Nikkei is looking like it will open higher. No doubt though, volumes are likely to be somewhat down as many traders keep to the sidelines ahead of the Fed meeting this evening.