USD in focus as key event risk approaches

Risk assets continued to consolidate despite a bout of strength in the USD.

Equities just edged higher while most currencies lost some ground to the USD. Comments from President Obama regarding a revision to the corporate tax structure would most likely encourage US firms to repatriate and as a result support the USD, just like the HIA.

AUD/USD remains in focus in the FX space, with some in the market now feeling a rate cut next week is almost a certainty. Glenn Stevens’ comments yesterday certainly stirred the pot, and we are now approaching the business end of the week on the USD side of the equation. With 18 of the 28 economists polled now expecting a rate cut to 2.5% and the swaps market pricing in a 95% chance of a rate cut next week, it is hard to bet against a cut. Near-term support for the pair is at 0.90 which is the bottom end of the month long range of 0.8999 to 0.9319.

Many of the AUD crosses including AUD/CAD, AUD/NZD, AUD/JPY and AUD/EUR have also fallen to fresh lows. AUD/JPY for example has broken below 90 and is now in the 88.85 region. Looks like it might head to 84 which is a sharp drop considering it was at 105 in April.

The uncertainty the greenback is facing is limiting the moves in the USD. We expect further near-term downside in AUD crosses as we approach the RBA decision. As a result, traders should look at the crosses for trading opportunities. EUR/USD and USD/JPY have been relatively sidelined in Asia and we suspect this will continue to be the case as positioning ramps up ahead of the event risk in the US.

Later today we have the ADP non-farm employment change, US GDP, Chicago PMI and the FOMC statement later in the session. No doubt all this data will set the tone for the USD and dictate how the risk space performs heading to the end of the week. ADP expected to fall to 179,000 and GDP expected up 1.1%. There is also a bit of data on the EUR side of things with German unemployment change and European CPI due out.

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