Talking Points:
- Aussie Dollar Drops, Yen Gains as China and EU News Fuels Risk Aversion
- Minutes from June FOMC May Boost Rate Hike Bets, Hurt Sentiment Further
The Australian Dollar underperformed in overnight trade – falling as much as 1.1 percent on average against its leading counterparts – as turmoil in China and an ominous end to yesterday’s EU summit fueled risk aversion. The safety-linked Japanese Yen outperformed, rising as much as 0.6 percent against the majors.
The MSCI Asia Pacific regional benchmark stock index plunged over 2 percent as Chinese shares plunged, yielding the worst performance since 2007 for the Shanghai Composite equities benchmark. The rout saw trading halted in 43 percent of China-listed shares. Meanwhile, EU officials took a hard line with Greece after the country rejected the terms of a funding deal proposed by its creditors at a referendum last weekend. Rhetoric following yesterday’s sit-down in Brussels suggested Athens has until an EU-wide summit on Sunday to change its tune or make so-called “Grexit” a near-eventuality.
Looking ahead, the spotlight turns to the Federal Reserve as it publishes minutes from June’s FOMC meeting. While the central bank flattened its expected tightening trajectory (compared with the March assessment), officials continued to call for two rate hikes in 2015. This stands in stark contrast with the markets’ priced-in outlook, which sees Chair Yellen and company waiting until early 2016 to resume policy normalization.
The situation echoes a similar one last year, when a dovish shift in investors’ bets following a soft first quarter was disappointed as the Fed continued to taper QE asset purchases and ended the program on schedule. If the Minutes document hints at a parallel scenario this time around, fears of imminent stimulus withdrawal may compound risk aversion. This will probably to weigh on sentiment-geared FX (such as the commodity bloc currencies) and fuel further strength in the US dollar and yen.
