The Japanese Yen and Dollar ended last week as the strongest major currencies, ahead of BoJ and FOMC meeting. Dollar traded soft most of the week as pressured by receding expectation for September hike after a string of weak economic data, as well as dovish speech by Fed Governor Lael Brainard. Indeed, as of Friday, fed fund futures are only pricing in 12% chance of a move next week. Nonetheless, the greenback surged after stronger than expected August consumer inflation reading. It's still generally expected Fed to stand pat after September 20-21 meeting. But there is possibility for a hawkish statement that paves way for a December hike. Also, Fed will release new set of economic projections that could paint a more optimistic picture as post Brexit worries subsided.
Yen strengthened on risk aversion and as traders lightening up positions ahead of BoJ. A comprehensive review of monetary policy is expected in the meeting. But it's believed that BoJ policy makers are split over the next easing steps. Some might even believe in continuing with the current government bond purchase program and negative rates and give time for the policies to pass through to the economy. Meanwhile, the financial industry in Japan sang a chorus opposing deepening negative interest rates. Opinions are divided on what BoJ would do in the end and the result could surprise the markets.
The Swiss Franc ended as the third strongest major currency on risk aversion. SNB left its monetary policy unchanged in September, keeping the sight deposit rate unchanged at -0.75% and the target for the three-month Libor at between -1.25% and -0.25%. While there's no press conference, it is unveiled in the post-meeting statement that the central bank acted in response to the Brexit shock. It reiterated the pledge to 'remain active in the foreign exchange market, as necessary'. More in SNB Left Policy Rates Unchanged, Reaffirmed FX Intervention To Prevent CHF Appreciation.
Meanwhile, Sterling ended the week as the weakest major currency as BoE signaled more rate cut later in the year. BOE voted unanimously to keep the Bank rate at 0.25% and the asset purchase program at 435B pound. Despite the encouraging macroeconomic data, BOE suggested that "the Committee's view of the contours of the economic outlook following the EU referendum had not changed". Meanwhile, if November's forecasts were "broadly consistent" with those in August, "a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC's forthcoming meetings during the course of the year". More in BOE Leaves the Door for Further Rate Cut in November.
Technically, the late rally in dollar index now put focus back to 96.25 resistance this week. Break there will resume the rise from 94.07 and likely that from 91.91 too. In that case, next near term target will be 97.56. However, price actions from 91.91 are not impulsive looking, we'd be cautious on strong resistance from 97.56 to limit upside. Sustained trading above there is needed to confirm underlying momentum. Meanwhile, break of 94.07 will turn focus back to 93.01 support instead.
Regarding trading strategies, our USD/JPY long (entered at 102.50) was stopped out at 101.90 as rebound couldn't gather momentum. We bought EUR/AUD at 1.4891 and the cross did jump to as high as 1.5094. But subsequent retreat dampened the immediately bullish outlook and we'll close out the position first. Renewed selloff in Sterling presents selling opportunity this week. Both developments in GBP/USD and GBP/JPY suggest down trend resumption. But to us, BoJ meeting has a larger down side risk then FOMC meeting. Hence, we'll sell GBP/USD at market this week for a test on 1.2794/2865 support zone. We'd anticipate an eventual break there to resume larger down trend.