Forex: Yen Falls, Aussie and Kiwi Dollars Rally on Dovish Fed Bets

DailyFX

Talking Points

  • Yen Sold, Aussie and Kiwi Rally as Risk Appetite Swells in Overnight Trade
  • S&P 500 Futures Hint Sentiment to Remain Well-Supported, US Data on Tap
  • FOMC May Disappoint Dovish Outlook Later in the Week, Boosting USD

The Japanese Yen sank amid ebbing haven demand while the sentiment-geared Australian and New Zealand Dollars rallied as risk appetite swelled in overnight trade. The MSCI Asia Pacific benchmark stock index rose 1 percent as regional investors took their opportunity to react to Friday’s soft US consumer confidence reading from the University of Michigan. The measure unexpectedly sank to the lowest since December 2012, hinting the Federal Reserve is likely to delay “tapering” QE asset purchases as the economic struggles with fiscal drag courtesy of the US government shutdown earlier this month.

Confirmation of a longer-lasting “full-sized” QE3 program will be sought at this week’s FOMC meeting. The consensus timeline has already started to shift, with the baseline scenario seemingly pointing to March 2014 as the start of the cutback process. The incorporation of this view into asset prices over recent weeks has pushed the S&P 500 to a new record high while sending the US Dollar sharply lower. As this process continues, the risk of outsized volatility is increasingly likely to come from any indication that tapering may begin sooner rather later.

Recalling the ultimately unfounded fears of the fiscal drag from an increase in payroll tax withholding and the “sequester” spending cuts on the US recovery earlier this year, the possibility that worries about the shutdown’s impact are overstated seems quite real. Furthermore, given the Fed’s recently spotty record of managing investors’ expectations, officials will probably want to see more hard evidence on the shutdown’s impact before tinkering with existing guidance. With that in mind, the absence of a discernible dovish shift in the FOMC policy statement’s rhetoric may weigh on risky assets and boost the greenback.

In the meantime, a quiet European economic calendar will see traders looking ahead to US Industrial Production and Pending Home Sales data. Economists are forecasting broadly neutral outcomes but US economic news-flow has deteriorated relative to expectations over the past four weeks, opening the door for downside surprises. That stands to further boost risk appetite in the near term. S&P 500 futures are pointing higher, bolstering the case for a risk-on scenario.

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Asia Session:

GMT

CCY

EVENT

ACT

EXP

PREV

1:30

CNY

Industrial Profits YTD (YoY) (SEP)

13.5%

-

12.8%

0:01

GBP

Hometrack Housing Survey (MoM) (OCT)

0.5%

-

0.5%

0:01

GBP

Hometrack Housing Survey (YoY) (OCT)

3.1%

-

2.4%

Euro Session:

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

9:00

EUR

Italy Business Confidence (OCT)

96.0

96.6

Low

11:00

GBP

CBI Reported Sales (OCT)

32

34

Low

Critical Levels:

CCY

SUPP 3

SUPP 2

SUPP 1

Pivot Point

RES 1

RES 2

RES 3

EURUSD

1.3689

1.3746

1.3774

1.3803

1.3831

1.3860

1.3917

GBPUSD

1.5996

1.6092

1.6129

1.6188

1.6225

1.6284

1.6380

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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