From the FXWW Chatroom – The short-term backdrop should be constructive for risk sentiment. The combination of Fed dovishness, the beginnings of dovish shifts by the ECB and BoJ and stabilization in asset markets following recent China driven volatility is likely to prove supportive for risk appetite. Any bounce in global equities could see investors rebuild some risk exposure among currencies.
-The defensive shift in positioning in the run-up to Fed looks overextended and creates risk for a reversal. Specifically, our analysis shows that JPY flow momentum went from flat to close to the highest level in a year over the course of August and September as investors bought the currency. Real money investors flipped from selling to buying. This could create risk for a JPY-negative pullback as the forces that were driving the JPY buying begin to ebb.
-JPY represents an attractive vehicle for tactical pro-risk trades for two reasons. First, Japanese equity markets are closed for the next three days, so there is less risk associated for weakness in share prices to translate to a stronger JPY. Second, a negative reading on Japanese CPI data later this week could stir disinflationary concern. A continued build-up in expectations for additional easing from the BoJ should exert downward pressure on the currency.
– There are few events in NZ this week aside from trade data. With limited new information flow on domestic developments, there should be lower likelihood that NZ-specific information will disrupt global drivers of the currency. This makes NZD a good proxy for broad swings in risk sentiment.