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Cautious risk tone with central banks in focus

It was all about the AUD yet again in the FX space as it continued its monster run and posted big gains against most of the majors.

All trading involves risk. Losses can exceed deposits.

AUD/USD has been significantly bid since yesterday’s GDP reading. The pair pushed to a high of 0.918 in US trade, coming within striking distance of the 0.92 handle. Traders are still eyeing 0.9250 as near term resistance.

Today we have trade balance due out at 11.30 AEST, with a $0.1 billion surplus expected. Expectations will be riding high following the recent readings we’ve received, and it’s not just against the USD which the AUD is rallying against. Traders are selling EURs and buying AUDs given the more positive feel towards China and global growth in general. We have also seen the swaps market now pricing in rate hikes in Australia for the first time since 2011, although we still see a possibility of a November cut if we get further poor employment and inflation data in the coming months. Technically the pair has broken some key levels to the downside and we’d continue to expect momentum to favour downside moves, with 1.3957 (the 38% retracement of the April to August rally) the longer-term target.

At 20:00 AEST tonight we get German factory orders, while at 21:45 AEST we get the ECB meeting and press conference shortly after. EUR/USD is sidelined at 1.32 but no doubt the event risk later today will likely result in some volatility after having been subdued all week.

USD/JPY is currently at 99.77 and looks like it’s headed to 100 in the short term. Traders weigh the potential impact of the sales tax hike and as well the BoJ decision. Finance Minister Aso confirmed that Japan is going to proceed with a planned two-stage sales tax hike, but it may be countered by an extra budget for fiscal spending. Mr Aso will announce the tax hike at the G20 nations summit this weekend.

Japan is looking to increase its sales tax from 5% to 8% and then to 10% as the country looks to repair its balance sheet. While this is nothing new, the timing is interesting as it has been changed from an April 2014 implementation to October this year. While the sales tax hike threatens to derail the recovery, the fact that Japan’s leaders are looking to counter the impact suggests that they are on top of the situation and we should hear more about how they plan to do so over the next week or so. This could even mean further stimulus might be on the way.

In US trade tonight we get the latest US ADP private payrolls report, with the market expecting 180,000 jobs to be created, while the weekly jobless claims are also in focus.

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