Summary:

  • US dollar extends gains in Asia after a hawkish call from the Fed
  • The BoJ holds steady but 1 dissenter calls for more action
  • Strong GDP, good poll limit NZD losses in Asia
  • AUD crushed as iron ore prices decline

The US dollar along with the British pounds are the two strongest currencies this morning in Europe following a rather hawkish message from the Fed yesterday. Let us recall that the Fed introduced a balance sheet normalization program but on top of that communicated another interest rate hike this year and this was clearly more than markets expected (we presented instant view on the FOMC here). 

This is clearly a different policy than the one of the Bank of Japan that said at today’s meeting: hyper-expansionary policy isn’t going anywhere. The Bank maintained short term rates at -0.1% and it’s pledge to buy enough securities to maintain 10-year bond yield around 0%. This was all in line with expectations but there was a surprise call from Goshi Kataoka who said that inflation target of 2% could not be achieved next year or anytime in the future and called for even more action. It’s hard not to agree with the first part – inflation in Japan could never really stabilize around the target of 2% but a call for even more purchases when the BoJ already owns some 40% of all the issued debt and a good chunk of stock exchange and is simply bound to face limits of its operations is simply stunning. However, do not be surprised – Kataoka was nominated to the Board earlier this year to replace members who were against such an aggressive policies so his “views” could be seen in a political context. Anyway for the markets it means no tightening in Japan any time soon and as such USDJPY will be driven mostly by the FOMC policy and equity sentiment. 

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There are obvious signs of weakness above the short term resistance of 0.8050 so the AUDUSD could be bound for a test of 0.7775 support. Source: xStation5 

AUD is by far the weakest G10 currency today as iron prices slid hard in China on signs of excessive supply. NZD is the second weakest as the currency used data and poll to its support. The Q2 GDP increased by 0.8% q/q in line with expectations but the Q1 growth has been revised upwards to 0.6% from 0.5%. The latest poll showed a firm lead of the ruling party (46%) to the labour (37%) an outcome that is preferred by the markets. Elections are to take place on Saturday.

Thursday is a bit calmer with the Philly Fed from the US being the key release (1:30pm BST).