US markets were closed overnight and will remain so on Tuesday in anticipation of hurricane Sandy, which is threatening the highly populated east coast of America, including the global business hub of New York. The significant drop in market participants kept liquidity across currencies light with the US dollar prominently bid across the board, including against the Japanese Yen which continued to weaken ahead of today's Bank of Japan policy meeting. The latest commitment of traders report shows a significant reversal of long-side positioning in anticipation of today's meeting, with positions moving from a net long of 10,000 contracts to net short 18,000.
Clearly markets have well and truly baked in the chances of at least 10-Trillion Yen of additional monetary easing, however the BoJ has a history of playing with the minds of investors ahead of such decisions. This suggests the bank may decide to take advantage of the key inflection set in recent weeks and hit the market with a 20-Trillion Yen offensive
Clearly markets have well and truly baked in the chances of at least 10-Trillion Yen of additional monetary easing, however the BoJ has a history of playing with the minds of investors ahead of such decisions. This suggests the bank may decide to take advantage of the key inflection set in recent weeks and hit the market with a 20-Trillion Yen offensive. Still, it's worth considering previous efforts to devalue the Yen - both in monetary easing and directive intervention - have been less than decisive, with only a short-period of weakness before a broad reversal in the following months. A surprise 20-Trillion Yen increase in QE may set the scene for a short burst of energy through the September highs just above Y80.6, before the USDJPY is once again at the mercy of broader risk trends.
Complicating matters in Japan is their very own version of the 'fiscal cliff,' with politicians in debate about increasing the debt ceiling, which threatens to disrupt the flow of capital required to finance spending initiatives. If the United States is any guide, Japan may be in for a lengthy period of political brinkmanship, with lawmakers willing to carry the debate to the brink of disaster before a consensus is reached. Japans Finance Minister Koriki Jojima has said the government will run out of money by the end of November if the bill to increase the debt ceiling is not passed.
Meanwhile the commodity bloc has started the week on the back foot with the Aussie, Kiwi and CAD easing against the greenback in unison. Hurricane Sandy has prompted investors to take a defensive stance with the US dollar the natural beneficiary, while other major themes such as the monthly payroll data on Friday suggests there's some sidelining in the lead up. European markets also contributed to headwinds with concerns Greece has still not reached a deal with the troika over budget reform need to secure their next bailout installment.
As widely reported, recent RBA data shows the bank have accumulated over A$800 million in foreign reserves through August and September, in what has been described as a form of 'passive' intervention. In essence, rather than translating accumulated foreign reserves back to home currency, the RBA is sitting on reserves in a passive attempt to take some of the froth off the top. We anticipate this exercise to be limited in duration given the risk of accumulating a mountain of US dollar denominated reserves, which carry little to no yield and watered down to the tune of $40bn per month, courtesy of the Federal Reserve. Nevertheless, recent times have seen a step-up in rhetoric from board members in relation to persistent strength of the local unit, suggesting the high Australian dollar is more than ever on the banks radar. While these concerns may given weight to a case for further policy easing, Stevens and Co are acutely aware of the limitations a small tweak in the cash rate has on the exchange rate, with the yield attached the Australian dollar still at a significant differential to that of other major economies. Earlier this month the bank said there is "scope" for policy to be "a little more accommodative" in light of headwinds both locally and abroad. While this may indicate another 25bps cut could be on the cards, it hardly suggests the start of a series of cuts needed to change the Aussie's innate appeal as a risk currency. This assures the Aussie's 'risk' credentials remain intact. At the time of writing the Australian dollar is buying 103.3 US cents. Scheduled events today include the HIA new home sales data, and investors will also be watching a speech by RBA Deputy Governor Philip Lowe on Tuesday for further clues ahead of the RBA policy decision next week.
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