FX Update: ECB meeting and US Treasury yields in focus this week.

RBA meeting on tap: The latest RBA meeting is up tonight with a division among observers on whether the RBA is set to delay a planned asset purchase taper set at the August meeting (to AUD 4 billion per week from AUD 5 billion). Last month saw Governor Lowe arguing against the effectiveness of the RBA purchases on any worsening of the situation, saying that the government was in a better position to support the economy until opening up is possible. The bank is arguably in a difficult spot here on making any kind of move, given the scale of covid-lockdowns. But Lowe and company may yet feel sufficiently confident to express the desire to look through near term weakness as state governments shift away from a zero tolerance strategy that has basically failed and instead look to further accelerate the pace of vaccinations, such that weakness may clear within a couple of months on a vaccination roll out, as we have seen in Europe.

Japanese equity market on fire on PM Suga resignation. Can JPY get involved? The JPY has weakened in line with the weakening in the US dollar of late, and the potential for further volatility in the currency (generally to the downside) could be further energized from two sources – the possibility of rising yields as discussed above and the Japanese election, which may bring with it some echo of the watershed election of late 2012 that brought anticipation of Abenomics – and more importantly Kuroda-nomics. The JPY, of course, is at a very different starting point this time around, trading near its weakest levels ever, but we’ll have a closer look in coming days/weeks at the candidate who emerges to take over the LDP and will therefore in all likelihood serve as the next PM. For the moment, the JPY will likely prove most sensitive to bond yields elsewhere. Looks like room for a surprise in either direction, even if Lowe normally defaults toward optimism.

EM getting a boost from credit spread compression, hike intentions. Emerging market currencies have received a boost on a very supportive risk appetite backdrop as credit spreads have generally been recompressing since peaking out in late July. From HUF and now especially PLN on the market’s repricing of central bank expectations, to MXN, RUB and even TRY, the market is rushing to take on risk. Poland’s central bank is meeting on Wednesday and, while the market expects no move this week (just today the central bank head said that raising rates would be risky), it is rushing to reprice expectations for future meetings, with two-year PLN swaps up almost 20 bps from late August lows. The Russian central bank, on the other hand, is expected to hike rates another 50 basis points to bring the policy rate to 7.00% in the bank’s race to get ahead of inflation.

Table: FX Board of G10 and CNH trend evolution and strength
Seeing a deepening of recent developments in the trend readings through Friday’s close, as the AUD and other smaller G10 currencies riding increasingly high while safe havens USD, JPY and CHF are lower, the latter two possibly on rising yields at the tail end of the week in addition to their traditional safe haven status.

Table: FX Board Trend Scoreboard for individual pairs
Note in the “Age(Days)” column that nearly everything has been wiped clean  as recent trends have nearly all shifted against former trending regimes. Also note that silver has flipped higher versus the USD on Friday and the same versus gold today, a possible indication of a renewed focus on inflation in commodities.

Upcoming Economic Calendar Highlights (all times GMT)

• US Markets Closed for Labor Day
• 0830 – UK Aug. Markit/CIPS Construction PMI
• 1110 – UK Bank of England’s Mann to speak
• 0430 – Australia RBA Cash Target