Currency markets have turned their attention the outcomes of a G20 meeting in Russia as well as an upper-house election in Japan this weekend.

Talking Points

Aussie, NZ Dollars May Rise if G20 Hints at Coordination on Stimulus
Japanese Yen Soars, Nikkei Plummets Before Upper-House Election

The stock high-profile scheduled event risk is largely exhausted through the end of trading week, turning the markets’ attention to two key developments due to cross the wires over the weekend. First, G20 finance ministers and central bank governors are gathering for a two-day meeting in Moscow.

Traders will be most interested in any discussion about the impact of monetary stimulus and its eventual withdrawal in the context of volatility following June’s FOMC meeting, where the Fed introduced the idea of “tapering” its asset purchases. The announcement sent bond yields soaring around the world as traders unwound positions dependent to cheap QE-linked financing, forcing undesired tightening.

While it is unclear what specific policy prescriptions can arise from such a discussion, a commitment to some degree of coordination between the world’s top monetary authorities may help underpin risk appetite. Such an outcome would bode well for sentiment-sensitive currencies including the Australian, Canadian and New Zealand Dollars.

Second, the markets will be keeping a close eye on the outcome of Japan’s upper-house elections. The latest polls suggest Shinzo Abe’s LDP party will expand its mandate, allowing the Prime Minister greater scope to push forward the fiscal side of his aggressive program to lift Japan out of deflation.

Traders are somewhat on edge: a comment from Abe advisor Koichi Hamada mentioning an eventual need to raise sales taxes sent the Nikkei tumbling while boosting the Japanese Yen overnight. Such a violent reaction at the mere mention of fiscal consolidation at some stage in the potentially distant future foreshadows the intense scrutiny likely to be given to Japanese policy initiatives emerging in rhetoric following the election outcome.

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