Forex

Risk assets may be on the rise, but it is more due to a pause in risk off as opposed to buyers rushing back in. Still, it could still allow for some bullish wriggle room on AUD/USD and bitcoin if sentiment allows.

US interest rate expectations are becoming increasingly influential on Japan’s Nikkei 225, both through the FX channel impacting forecasts for exporter earnings and sentiment towards the outlook for global economic growth. Other factors, such as commentary from BOJ, come across as secondary factors for now.

The technical bias in USD/JPY will remain to the upside as long as it remains above the 146.00 level.

Shinichi Uchida, Deputy Governor of the Bank of Japan (BOJ), says the bank won’t hike interest rates when markets are unstable, delivering a clear message on what traders need to do to prevent them doing so again: create volatility.

New Zealand’s jobs report beat across the board in the June quarter with unemployment undershooting forecasts while wages growth, employment, participation and wages growth topped expectations. However, the details were not as impressive, keeping the prospect of an August rate cut from the Reserve Bank of New Zealand in play.

With USD/JPY holding above key support after the daily RSI reached its most oversold level since 1996, the 1-hour bull flag could tempt bulls. The ASX 200 also shows the potential for another leg higher, even if small.

The spotlight is on the USD/JPY and other yen crosses right now, with a particular focus on the ongoing unwind of carry trades that continues to make waves across financial markets.

Market turbulence often presents lots of opportunities, but there is still excess froth to be shed as the unwinding of leveraged carry trades persists for now. For now, the greenback has rebounded, helped in part by the stronger ISM services PMI. Still, in light of the recent events and expectations of a sharper pivot by the Fed than was previously expected, the EUR/USD outlook remains mildly positive.

There are few FX pairs with a greater sensitivity to US interest rate expectations than USD/CHF, making it an excellent candidate for traders to look at ahead of the key US ISM services PMI report that will be released later in the session.

We’ve seen a vast reduction of net-short exposure to yen futures over the past four weeks. And with the yen rising over 4% since Tuesday's close, it’s likely large specs are already net long.

If the Nikkei 225 outlook is a function of moves in the Japanese yen due to the impact on exporter earnings, what should traders monitor to gauge when USD/JPY may bottom? Because right now, the risk-off tone in FX is flowing through to equities, feeding upon one other to create an ugly snowball effect in Japanese markets.

Two RBA speeches and a monetary policy decision along with updated RBA forecasts are the highlights of the week for AUD/USD traders on the domestic front. Although risk-off tones and an ISM services report could prove to be the bigger drivers.

It looks like the United States may be entering recession. For EUR/USD traders, whether incoming data solidifies or weakens that view will likely determine how the pair performs this week. The tone will be set early with the most important piece of information arriving Monday.

There is one more macro even left that could provide even more volatility in the markets, namely the ISM services PMI on Monday. I reckon once the equity market volatility settles, the recent weakness in US data should translate into a more widespread dollar weakness. So, I maintain a bearish dollar forecast for the week ahead, especially now that we have seen a weaker jobs report today.

Leading indicators point to a below expected reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 125K-175K range.

Wednesday was a day of divergent policies that saw the Bank of Japan (BOJ) hike rates more than expected and the Fed signal a cut. And that saw the US dollar and yen broadly move their separate ways.

This morning’s release of stronger-than-expected Eurozone CPI has made a September rate cut from the ECB a close call, helping to ease the pressure on the single currency. The euro gained ground against most majors except the yen with the latter surging on the back of the Bank of Japan’s surprise 15 basis point rate hike overnight. Attention is now turning to the US side of things as we approach the second half the session with a couple of second-tier economic data to come before the FOMC’s policy decision at 19:00 BST.