USD: Downside Corrective; Buy Dips
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The USD has been broadly capped and the JPY in demand over the past few sessions. Positioning has been the main driver of FX moves. Ahead of the FOMC, the favored positions of investors appear to have been long the USD vs the JPY and NZD. The weak Nikkei also helped push the JPY higher. Further newswire reports about Japan’s planned new fiscal package did nothing to alleviate the risk off sentiment with the market clearly nervous ahead of the BoJ meeting tomorrow and skeptical that it can deliver on investors’ high expectations. The newswire reports said that of JPY7trn of the JPY28trn fiscal package will be new spending measures.
When it comes to the Fed, the central bank probably did deliver as much as could have been expected at this point, including a more upbeat economic assessment and a reference to diminished near-term risks,. This suggests the Fed is keeping all options on the table, including a September rate hike. The bigger picture remains the same. As long as data holds up, the bias for yields and the dollar should remain higher since markets are only pricing half a hike by year-end. As such we believe the latest move lower is corrective rather than a change in trend.
We believe that USD dips should be bought, for instance against commodity currencies and even low yielders such as the franc.
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