Weekly FX Focus

The rally in the greenback has been more broad based over the past week, with a catch up seen in the USD/JPY. We have indeed seen Japanese officials commenting on its currency more frequently in recent weeks, and although they have not necessarily been advocating a weaker JPY, most of the comments indicate they are comfortable with the decline in the currency. The commodity-laden currencies have also registered more notable declines last week, particularly the AUD and CAD, having previously lagged the declines in a number of other G10 currencies versus the USD. This week will be all about the US Federal Reserve. The tone that the central bank strikes will prove critical to the USD one way or the other. The statement and revised Summary of Economic Projections (SEP) will be available at 2pm EST on Wednesday and Chair Yellen’s press conference will begin a half hour later.

    We continue to factor a regular US$10bn reduction at the coming meeting and we still expect the QE to be fully terminated by the 28-29 October 2014 FOMC with a US$15bn cut as the last step. Whilst we do not expect the Fed rate normalization to take place or even to be announced this time, we will be looking for any material shift in the Fed language within its FOMC statement, specifically whether the Fed will continue to include,” The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends…” The possible removal of the phrase (underlined here) could raise expectations for impending rate hikes and send the dollar strengthening further against the major and emerging-market FX.