In Asia, liquidity remains thin across the region, as activity is picking up with small USD selling on the back of the broader USDJPY moves.
USDJPY is selling as the Nikkei takes another blow as is down by 1.7% in early trade today. Investor sentiment continues to fall.
Another tumultuous London session meant trading of the Australian dollar fell below the 0.70 mark, as the currency finally appeared to capitulate to the latest bout of risk aversion.
“The AUDUSD retraced aggressively at the New York Open, as risk-off sentiment abated temporarily, with both US equity and bond markets stabilizing markets in the interim. The markets are taking a breather ahead of Fed Chair Yellen’s testimony, which could trigger a tsunami of US dollar volatility,” remarked Stephen Innes, senior trader at OANDA Asia Pacific.
While markets are hoping for a glimmer of optimism in her testimony, the unsettled narratives faced by traders are unlikely to turn positive in the near future. “If her comments prove supportive, it is likely that we are in for a short relief rally, followed another wave of risk aversion, as sentiment amongst traders remains extremely risk averse and poised to ‘sell the farm’ at moment’s notice,” added Innes.
If current market conditions are an indicator, the AUD is in for a rough ride. The currency eventually broke down overnight, succumbing to nonstop waves of the risk aversion that gripped the European region after reports of that European Banking centres face a critical cash crunch.
“The EU banks took a beating in non-performing energy-related loans and it has had a contagious effect on Asian banks,” says Innes. “There is nothing like fear mongering in the equity markets when it comes to bank sector. Investors appear to be dumping stocks and investing safely in Government bonds. The issues with oil-related loan portfolios might only be the tip of the iceberg, as banks increasingly deal with slowing global growth. Expect the uncertainty to continue.”
The possibility of a dovish surprise from Yellen, especially if she categorically pulls the March rate hike from the Fed Calendar, would benefit the AUD. “Especially so if the market starts aggressively discounting the rate hikes further along the curve,” says Innes. “I expect US interest rates and bond markets to be the main currency drivers over the short term. Differentials have narrowed greatly in 2016 and any further taper of US rate hike expectations will weigh negatively for USD.”
A more likely outcome will likely be a reiteration of the January 27 FOMC. Innes remarks, “The Fed is closely watching the recent tightening in financial conditions, and the developments in the European markets could affect their monetary policymaking. While she should reiterate the Fed’s data-dependence, it is unlikely Yellen will surprise the market by explicitly taking rate hikes off the table.”
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