Japanese Yen - Apprehension Dominates

Please attribute the following commentary to Stephen Innes, senior trader at OANDA

Japanese Yen - Apprehension Dominates

USDJPY is expected to trade within the broader ¥99-102 range near term. This morning, we've perched apprehensively as the USD has opened a bit higher across most majors, following weekend remarks by Fed Vice Chair Stanley Fischer. However, there has been good selling interest above ¥100.60 in early trade, with the Fed-dovish element in the market selling into this morning’s USD bounce.

There appears neither sufficient reason nor cause to raise bets or fold the cards at this juncture. While conviction lacks for either direction, the threat of intervention may provide sufficient buffer to keep downside momentum temporarily in check in the face of Fed policy uncertainty.

Beyond the veiled threats of intervention, traders continue discounting the BOJ’s ability to stem the strengthening Yen and, if as expected, Dr. Yellen maintains a dovish Fed tack, traders will be quick off the mark to test the BOJ’s resolve and will likely assault the Brexit .9902 lows.

Yuan - Not Much to See Here

Expect another week of tight ranges to prevail in the lead up to the G20 in Hangzhou. Given this is the marquee event in China for 2016,there's lots of motivation for policy makers to keep markets stable. While there will likely be some intermittent, externally induced volatility from US economic data and Dr Yellen’s speech at Jackson Hole, the market is not overly concerned about any internal or external unexpected policy shock. A lack of overall enthusiasm should keep the RMB currency complex running in neutral until the G20.

Ringgit – The Stars Align

We could see an extension of the Ringgit Rally below 4.00 USD MYR this week as oil prices continue to rise and a resumption of the USD downtrend persists, after the Greenback had its day in the sun on Friday. The expected catalyst for the USD dollar will be increasing expectations that the Feds will remain in pause for a cause mode, while oil prices should remain supported by OPEC production freeze speculation.

Australia - A Falling Star

The AUD was a falling star after Moody’s Investor Services cut their outlook on domestic banks to negative from stable, while highlighting a plethora of reasons for the move including low pay increases, record low-interest rates and rising household debt for the decision. Australian Banks are among the highest rated banks in the world, but are facing increasing provision for bad loans from the mining sector and households in those respective regions, due to job losses.

To keep things in perspective, Standard and Poor’s placed Australian Banks rating on negative back in July, based on the fact that the borrowing costs for the Banks would accelerate if the Federal Government came under Debt Rating pressure. While it's hard to avoid short-term volatility on the back of debt agency musings, currency reactions to rating downgrades tend to be short lived, as we've seen so often in the past.

However, the higgledy–piggledy price action of the past few sessions would indicate that traders are at 'minimum' and are starting to re-think the low volatility carry strategy that is underpinning the Australian Dollar. The rejection of .7700-20 zone in the face of supportive Employment Data does suggest the Aussie Bears are gradually awakening from hibernation and may believe the AUD is topping.

Whether the particular trigger is the rating agency outlook or the shift in Fed rhetoric, the truth is probably somewhere in the middle.

The AUD is back pressuring the .7600 levels after the USD has opened a bit higher across most majors following weekend remarks by Fed Vice Chair Stanley Fischer, the elder statesman on the FOMC who's roosting with the hawks. Reflecting on the Fed's dual mandate, Fischer told a Colorado audience that, "So we are close to our targets", noting the core PCE inflation was "within hailing distance" of 2% and unemployment "close to most estimates of the natural rate.

On the domestic front, we have a relatively quiet week, so external factors will drive the AUD. Expect an uptick in volatility to muddle through during the build-up to Chairperson Yellen's August 26 speech at Jackson Hole.

There are many hurdles that need to be overcome for a September US rate hike, which should provide enough excuse for Dr. Yellen to hit the pause button once again; likely deferring the decision until December. This outcome could appeal to the commodity currencies and provide a tailwind for the Aussie bulls.