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Research Market strategy
by Swissquote Analysts
Daily Market Brief

USD bounces back as investors refocus on tightening

AUD extends losses as the greenback bounces back

By Arnaud Masset

After a painful week, the US dollar started the week on the front foot, extending gains against most of its peers. The dollar index tumbled 2% last week amid a sharp appreciation of the single currency (+2.07%), the loonie (2.34%) and the pound (+2.41%). The Japanese yen was the sole G10 currency to lose ground (-1%) as investors returned to riskier assets, searching for yields.

Despite a solid performance last week, the Australian dollar was no exception this morning as it slid 0.22% against the greenback. The Aussie has been trading within a compact upside channel since May 9th, with AUD/USD rising from 0.7329 to 0.7712, a 5.20% ride. However, it seems the party is coming to an end.

Building approvals figures, which were due earlier this morning, came in well below estimates, contracting -19.7% y/y, or -5.6% on a monthly basis, signalling that the cooling in Australia’s residential housing market has become a trend. This contraction in new homes approval has two main effects.

On the one hand, the slowdown in construction will weigh on the economy in H2, while it was a solid growth driver over the last few years. On the other hand, it gives a breath of fresh air to the Reserve Bank of Australia, giving it the freedom to adjust freely its monetary policy, without having to worry about fuelling the housing bubble.

A key resistance lies at 0.7750 (high from March 21st), then 0.7849 (high from June 18th 2015). On the downside, the closest support can be found at 0.7566 (Fibo 38.2% on May-June rally). As reported by the CFTC, net long speculative position reached 21.95% of total open interest as of June 27th. A potential unwinding of those positions creates significant downside risk in AUD/USD.

Political upset in Japan

By Peter Rosenstreich

The global wave of populism has finally reach Japan’s shores. In an historic upset, Tokyo Governor Yuriko Koike's Tokyo Citizens First Party and its partners won a clear victory at Sunday’s Tokyo Metropolitan assembly election.

The political party, practically unknown outside of Tokyo. secured 79 of the government’s 127 seats and saw the LDP representations collapse to an all-time low of 23 seats.

The unprecedented outcome indicates that Japan is increasing frustrated with the PM Able administration and LDP leaders. Domestic issues such as Tokyo Olympic preparations, granting approvals of private schools and fast-tracking anti-terrorism legislations have all added up.

This serves warning that on a national level anti-Abe sentiment will further erode LDP support. However, the largest opposition force - the Democratic Party - is also suffering from weak approval ratings.

While the election results had minimal impact on financial markets, in the longer term this result will challenge Abenomics and the ultra-accommodating monetary policy driven by the BoJ.

A reversal of current policy would have a profound effect, as the strategy is critically supporting equity prices and keeping the yen weak. Should the BoJ further back off asset purchases and pinning the yield curves, the yen would easily rally higher pushed USDJPY towards 90.

Currently the ultra interest rate sensitive USDJPY will be driven by a shift in the US / JP rate differential. With Japan's rates stuck, it will be US short end yields that should push USDJPY higher. The market is currently underpricing the Fed commitment to higher interest rates including, what we expect, a 25bp rate hike in December. As US data firms and Fed comments support interest rate tightening, we target 114 with a fully priced-in December hike.

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