Talking Points:

Aussie Dollar Sinks on FOMC Minutes, China PMI, RBA Intervention Threat
Japanese Yen Declines as Fed QE Taper Speculation Drives USDJPY Higher
Euro Little-Changed After Volatile Response to November’s Flash PMI Data

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The Australian and New Zealand Dollars plunged as most Asian stock exchanges slumped, pulling down the sentiment-linked currencies along the way. The MSCI Asia Pacific regional benchmark index fell 0.7 percent amid fears that the Federal Reserve may begin to scale down its stimulus efforts sooner than expected after minutes from October’s FOMC meeting printed on the hawkish side of investors’ forecasts (as we expected). The move lower was compounded as HSBC’s China Manufacturing PMI gauge revealed that factory-sector activity slowed more than economists expected in November.

The Aussie Dollar narrowly underperformed its Kiwi namesake as RBA Governor Glenn Stevens said the central bank was “open-minded” about FX market intervention. The central bank chief argued that the currency is above expect levels in the medium term and warned that although officials are still unconvinced about whether the benefits of intervention outweigh the costs, current inaction doesn’t mean the RBA will always remain on the sidelines.

The Japanese Yen fell as much as 0.8 percent against its leading counterparts. USDJPY appeared to lead the way as the spread between US and Japanese 10-year bond yields to 218.4bps in the wake of the FOMC Minutes release. That is just a hair shy of the two-year high at 221.7bps recorded in September amid expectations of an imminent “tapering” of QE3 asset purchases. Japan’s benchmark Nikkei 225 stock index closed up 1.92 percent, diverging from equity performance elsewhere in Asia and recording its strongest gain in five days. The newswires attributed the move to the weaker currency’s implications for export-geared sectors.

The Yen began to slide in early Asia, paused briefly to await the outcome of the Bank of Japan monetary policy announcement, and resumed a several hours thereafter as it became clear the status quo will remain in placefor now. The central bank opted to keep monetary policy unchanged, maintaining its annual monetary base target at ¥270 trillion. BOJ Governor Haruhiko Kuroda said it was too soon to discuss changes in strategy with the economy moving on the right track but pledged to make adjustments if necessary. Japan’s headline year-on-year CPI inflation measure hit 1.1 percent in September, the highest in over five years.

The Euro was little-changed on net in the aftermath of sharp seesaw volatility as November’s preliminary PMI data set crossed the wires. The single currency initially plunged as French PMIs registered sharply below consensus forecasts but swiftly recovered following a firm set of analogous figures out of Germany. The region-wide Composite PMI figure edged down to a three-month low. Looking past near-term volatility, that is likely to keep alive the argument in favor of further ECB accommodation and we continue to hold short EURUSD.

Fed policy speculation is set to continue in the hours ahead as the weekly set of US Jobless Claims figures hits the tape. Initial and continuing claims are both expected to print lower, feeding bets on a relatively sooner move to cut back QE and encouraging the US Dollar higher. Another spirited round of “fed-speak” is likewise on tap, with Governor Jerome Powell as well as Richmond and St. Louis Fed Presidents Jeff Lacker and Jim Bullard (respectively) due to deliver commentary.

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