• US dollar moves higher in Asia supported by Yellen
  • AUDUSD could be set to test 0.7775 as positioning works against it
  • Stocks were little changed with CHNComp gaining the most 

The US dollar is the strongest G10 currency in Asia and although gains are limited in scale it’s a continuation of a move that started already last week. Investors who expected Janet Yellen to douse expectations for the rate hike in December had to swallow a bitter pill after Yellen turned out to be even more constructive than at the post meeting conference last week. The main points of her speech include:

  • factors lowering present inflation are temporary
  • inflation will stabilize around 2%
  • would not be prudent to wait with normalization until inflation target reached
  • Fed needs to be careful not to move too slow (!)
  • A policy that is too accomodative could pose a risk to financial stability

Well, there should be no doubt where all this leads to – unless there is a marked slowdown in the economy the Fed is on track to hike rates in December and add on to those moves next year while at the same time moving forward with balance sheet normalization. For the markets it’s a reason to reprice rate expectations quite decisively. Let us stress that ahead of the last FOMC meeting markets priced in a full hike as late as June 2018 so to move it to December of this year means that USD has quite an upside. Indeed could see on Monday that USD Index (USDIDX) stormed past an upper limit of a downward channel and could be on its way to the first resistance at 94 pts. USDIDX is among our top picks for the final quarter in a report that we issued last week.  

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USDIDX keeps moving up after making it out of a downward channel on Monday. Source: xStation5

While the US has been the strongest G10 currency in Asia, AUD has been the weakest and we can indeed see a nice downward movement on AUDUSD that could see a test of 0.7775 support. We pointed out yesterday (here) that while speculative investors were net USD short ahead of the FOMC they were at the same net long in AUD and those net longs were at the highest level this year. That could see a selling pressure on the pair if solid sentiment behind the greenback continues. 

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AUDUSD could test 0.7775 support. Source: xStation5 

Speaking about the Asian session stocks were mixed after another non-event session in the US. The Chinese indices were slightly up (especially CHNComp, up 0.66%) but Japan (JAP225) and Australia (AUS200) were a notch down. Gold was under pressure from the rising US dollar.  

Calendar for Wednesday includes some interesting positions like durable orders in US, Poloz speech (Bank of Canada), DOE report on US oil inventories and most importantly the RBNZ meeting  – the last major central bank meeting in September.