US dollar stable, yen primed for weakness, Aussie dollar slips

The USD index looks to have settled at a relatively weak level around 79.00 aided by the stabilisation of US Treasury yields (10 year around 2.5%). Upside for the USD will be restricted given a likely run of softer economic releases this week including September retail sales, and October consumer confidence today.

The data may help to support expectations that Fed tapering may not take place until March / April next year although the Fed FOMC decision later this week will hopefully give more clues on this front. In any case the USD may already have priced in softer data and delayed tapering expectations, suggesting that the risk / reward will increasingly turn more USD positive over the coming weeks.

USD/JPY looks set to move higher over coming weeks breaking out of its recent range. Relatively higher US Treasury yields versus Japanese JGBs yields, improving risk appetite and improving technicals (USD/JPY remaining above its 200 day moving average) will be supportive for renewed upside in the currency pair.

While the Bank of Japan is unlikely to act this week on policy the risks of further action will only increase over the coming months as it becomes apparent that reaching and sticking to its 2% inflation target will not be possible given current settings. In turn, the JPY is set for further downward pressure.

Does the slippage in AUD over recent days presage a strengthening in the USD? AUD and USD (index) have registered a strong negative correlation over the past three months, with the former benefitting from weakness in the latter. Over recent days the USD appears to have stabilised while AUD has lost steam, with pressure intensifying in the wake of comments by RBA Governor Stevens who attempted to talk the currency down.

I doubt the AUD will fall much from current levels but the absence of key domestic data (only private sector credit growth and building approvals on tap this week) will focus attention on external factors, namely the Fed FOMC outcome and in particular Chinese manufacturing confidence at the end of the week.

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