The Fed: A Great Divide or A Growing Rift


By any measure of price action, the longer Traders have to dwell repetitively and ruminate on the Fed policy the less US dollar friendly they are likely to become.

From the rhetoric making the rounds  , it would seem that Federal Reserve officials face a very complex, and possibly divisive  debate over the conundrum of an improving employment sector against a background of low inflation and tepid consumer spending.

In separate Statements this week, policymakers central to the debate outspokenly laid out divergent viewpoints. Fed Dudley, influential within the Fed ranks, clamoured for a rate hike while the no less influential Fed William, whose academic letter caused a sweeping re-think of the Fed’s intentions, was equally as hawkish. On the opposite side, a frank Fed Bullard  staunchly supported his view that a single interest hike may be all that is required long term, with absolutely no need for a near-term adjustment. If together the recently awakened force of Dudley and Williams make tangible inroads among their colleagues, perhaps the Doves will no longer dominate the roost.

I expect increasing chatter among the Fed decision makers as we approach the August 26 Jackson Hole Symposium. Ultimately, in a middling global economic environment, if recent history tells us anything about the current Fed board, the preferred risk control approach is to delay interest rate hikes.

Aussie Dollar – Asymmetrical Appeal
The dollar lower trend appears to be the preferred near-term direction, in which case the Australian Dollar should remain a buy on dips. However, given the market proclivity to focus on Fed Speak, we are more likely in for a choppy ride in the interim, as I suspect only comments delivered from Chairperson Yellen herself will trigger the next broader USD dollar move.

Currently, the market is finding its comfort zone swinging 50 pips either side of 77 level, as interest wanes heading into weeks end. Moves have been shallow overnight with few triggers to change the current dynamics.

External factors continue to drive local sentiment and as such, I anticipate the asymmetrical reaction to local data, in that below consensus, data will have limited price movements, while a stronger AUD will reward consensus data prints. Weaker data prints will not alter the current RBA narrative while more solid data points may increasingly factor into the near-term rate debate.

An interesting titbit from Governor Stevens was making the rounds overnight. In an interview with The Australian newspaper, he referred to welcome and unwelcome types of Capital inflow, which spurred debate overnight on trading desks. From a policy perspective, this appears clearly directed at Foreign property speculators. While stopping short of increasing transaction taxes, it may be some foreshadow of capital controls to come, opening up a potential interest rate policy response.190816fJapanese Yen – Lacking Enthusiasm
The Yen is oscillating between ¥99.50 and ¥101. The ¥99.50 test appears the more likely outcome as the market is convinced there is little the BOJ can do to halt the move. While the markets want to press the lower boundaries, a pre-weekend test is unlikely given the jawboning and warning shots from the MOF, not to mention that enthusiasm has started to wane as August holiday mentality takes hold.

I expect USD rallies to be initially sold, but could ultimately give way given the market positioning, as short covering into the weekend may dominate flow.

Today’s Tokyo fix may be a good indication for local Tokyo demand for dollars, which could set the pace in the market today. Any move below ¥.9975 will likely face local importer demand, as fear of BOJ intervention will increase on any move below the Brexit ¥.9902 level.

The complete Fed narrative is required to make a bold move at this level and the market may well sit on the fence until post-Jackson Hole.190816gYuan – Listless Directionless
With few motivation from mainland political musings, traders taking the USD  random walk with no apparent discernible pattern or trend.

With traders not looking to fall into a value trap ahead of the next broader USD move, I suspect there will be little interest until September when speculators will start shaking the trees again.190816hMYR- Rangy Ringgit 
Bond markets are attracting all the attentions as it was announced that GII would be part of the JPMorgan’s bond indices starting from Oct 31

The ringgit remains more or less sidelined, importer demand below 3.99 limiting MYR rallies with few willing to chase the moves. Summer time market conditions likely to prevail until September.

About Stephen Innes

StephenSenior Currency Trader and Analyst, Stephen has over 25 years of experience in the financial markets and specializes in Asian currencies at OANDA . After having started his trading career with NatWest Bank, he is currently based in Singapore as a Senior Currency Trader and Analyst with OANDA, focusing on the movement of the Aussie Dollar and ASEAN Currencies. Stephen has an extensive trading experience in Interest Rate Futures, Money Markets and Precious Metals. Prior to joining OANDA, he worked with organizations like Cambridge Mercantile, Nat West, Garvin Guy Butler, Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario. Follow on Twitter profile.

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