US Dollar Looking to Fed-speak for QE Reduction Clues

The US Dollar is looking to comments from Chicago Fed President Charles Evans to shape expectations for a September move to “taper” stimulus efforts.

Talking Points

US Dollar Looking to Comments from Chicago Fed’s Evans for Direction
Japanese Yen Sold as Nikkei Rallies on Pension Fund’s Portfolio Shuffle
Aussie Dollar Rallies as RBA Offers No Clear Signal on Future Rate Cuts

A relatively quiet economic calendar in European trading hours shifts the spotlight to the US docket, where the focus will be on Chicago Fed President Charles Evans. The vocally dovish policymaker is a voting member of the rate-setting FOMC committee this year. A prepared speech is not scheduled; rather, Evans will be answering reporters’ questions, who will no doubt grill him on the likelihood of a reduction in the Fed’s monthly asset purchases at the September policy meeting. If Evans is perceived to be in favor of “tapering” the size of the QE effort, this is likely to broadly boost the US Dollar, and vice versa.

The Japanese Yen underperformed in overnight trade, falling as much as 0.4 percent on average against its leading counterparts. The move tracked an advance in the Nikkei 225 benchmark stock index, suggesting a sentiment-driven unwinding of carry trades funded in terms of the perennially low-yielding currency was the catalyst behind the move. The news-wires chalked up the Nikkei rally to a Reuters report suggesting Japan’s civil servants’ pension fund is weighing investing more of its capital in shares versus domestic bonds.

The Australian Dollar rallied as expected after the RBA delivered a widely expected 25bps interest rate cut without offering explicit guidance pointing to continued easing at upcoming meetings. The tone of the policy statement turned nominally less dovish, with the punch-line proclaiming policymakers will “continue to assess the outlook and adjust policy as needed,” which stands in contrast to last month’s assertion that the “the inflation outlook… may provide some scope for further easing.” Going forward, this is likely to make for a data-sensitive environment, putting the spotlight on July’s Employment data. Chinese Exports and CPI releases may likewise prove important considering the Aussie’s sensitivity to growth trends in the East Asian powerhouse.

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