Talking Points

Japanese Yen Sinks on Carry Demand as Risk Appetite Swells After FOMC
NZ Dollar Outperforms as 2Q GDP Data Bolsters Hawkish RBNZ Outlook
Jobless Claims, Existing Home Sales Data May Reinforce US Dollar Selling

The Japanese Yen came under aggressive selling pressure, plunging by as much a 1.2 percent on average against its leading counterparts, as a swell in risk appetite across the financial markets drove demand for carry trades funded in terms of the perennially low-yielding currency. The MSCI Asia Pacific regional benchmark stock index soared 2.2 percent after the Federal Reserve unexpectedly opted not to reduce the size of its QE3 stimulus program.

The New Zealand Dollar outperformed, adding as much as 0.8 percent against the majors in the wake of supportive second-quarter GDP figures. The data set showed that year-on-year economic growth rate accelerated to 2.5 percent in the three months to June, topping forecasts calling for a 2.3 percent result. Furthermore, the first-quarter reading was revised higher to 2.7 percent from the initially-reported 2.4 percent result. The outcome reinforced what has become the most supportive monetary policy outlook in the G10 FX space, with investors pricing in 83bps RBNZ tightening over the coming 12 months.

The quarterly monetary policy announcement from the Swiss National Bank proved to be a non-event as Chairman Thomas Jordan and company opted to maintain the target interest rate in the 0.0-0.25 percent range and the EUR/CHF floor at 1.20 as expected. The British Pound came under pressure after Augusts’ Retail Sales report fell short of consensus forecasts, showing core receipts grew 2.3 percent year-on-year and disappointing calls for a 3.2 percent increase. The knee-jerk selloff may not prove to have lasting follow-through however considering the soft outcome was amply telegraphed in an analogous report from the BRC two weeks ago and we remain short EURGBP.

Looking ahead, the spotlight turns to the weekly set of US Jobless Claims figures as well as Augusts’ Existing Home Sales report. Deterioration is expected on both fronts, which stands to reinforce the Fed’s reluctance to begin stimulus withdrawal. This may put further downward pressure on the US Dollar after the currency hit a three-month low yesterday. It may likewise amplify the risk-on push across the financial markets, boosting sentiment-linked currencies including the Australian Dollar. Indeed, S&P 500 futures are trading notably higher ahead of the opening bell on Wall Street, hinting the chipper overnight mood is likely to carry forward. With this in mind, we continue to hold long AUD/USD.

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