ASIA MORNING: RBA October Borderline

*AUD catches employment and unemployment data
*BoJ to (not) react to Fed hawkish cut
*Recap of Fed aftermath

Significant points of data for October RBA

The main AUD data points, Aug m/m employment change and Aug m/m unemployment rate, will be released at 11.30am AEST today. These data points, as explained in previous calls, are likely to draw larger reactions from the market given The RBA's unwavering focus on the Aussie labour market, and in particular, job creation. That said, these data points are building up as key components into the RBA's October decision.

Consensus for employment change currently stands at 15.2k. Interestingly, considering the prior 12 months of employment data figures, expectations have been beaten on 9 out of those 12 occasions. However, given the prior month of July where employment came out 41k vs 14k consensus, I'd expect a slightly lower figure yet still leaning on the beat side. 

AUD m/m Employment Change. Source: Eikon

The unemployment rate, expected to print 5.2% (Reuters are polling 5.3%), has been in line with consensus over the prior two months. Should the rate print higher, expect it to feed through to employment data which would then be less likely to beat (more unemployment = less jobs).

There's also a few other key releases in the Aug m/m participation rate forecasted at 66.1% and full-time employment. While both secondary, you can be sure markets are keeping tabs. Be mindful that these two data points add nuance to the overall jobs picture in the Aussie labour market seen by the RBA.

Since Monday, expectations of a 25bps rate cut have increased substantially with markets pricing it in at a 53% probability (up from 43%). 
Look for AUDUSD to move back into pre-Fed territory around 0.685 and ASX to try again for 6,700 on a rosier labour picture. However, with the question of why Governor Lowe is scheduled for an unexpected appearance on the day still unanswered, also look for traders to fade an AUDUSD push higher on lingering cut expectations.  


BoJ decision-making process

With the Fed hawkish cut now delivered, The BoJ are set to assess their options explained in yesterday's Ahead of BoJ September preview
To summarise, my main contention given previous BoJ sightings and in line with market expectations, is that the BoJ 1) keep all policy rates unchanged; and 2) keep asset purchasing guidelines the same.

There was some risk prior to The Fed that BoJ could come out dovishly depending on how USDJPY reacts. However, in my view, that risk seems to be squashed for the time being. Given USDJPY edged higher post Fed and the propensity for The BoJ to want a weaker Yen (because of stronger inflation effects), it's unlikely BoJ make any drastic changes to its monetary policy. 

Taking into consideration the aftermath of The Fed's hawkish cut and The BoJ's mostly priced in no change decision, look for USDJPY to maintain a tighter range with some retracement of this morning's up move and Nikkei to remain elevated. Naturally USDJPY 1w forward volatility is also down 1% post Fed. 


Fed hawkish cut 25bps as expected

In line with market expectations, The Fed delivered on a hawkish 25bps rate cut with other rates (IOER, Repo) also cut by 30bps in light of the recent liquidity shortages for USD.

The highly anticipated median dot plot saw no further rate cuts in 2019 and 2020, with 2021 and 2022 showing hikes as the median case across members.

Having read through Powell's Q&A transcript, I've been left with a fluid impression of The Fed going forward. In particular, where Powell reaffirms a Fed that intends to be "highly data-dependent" making decisions that factor in not only the domestic economy but "the evolving risk picture".

The reaction to The Fed manifested in a multitude of moves across markets, summarised as such: 

  • US yields repriced. US 1y yields +5bps. US 2y yields +8bps. US 10y yields +4bps. 
  • USD was broadly bid against G10 as yields repriced higher. 
  • AUDUSD sold 40pips breaking 0.6825-30 support though has now retraced back above.
  • USDJPY made a run for 108.45 but is since lower. NZDUSD, EURUSD also dropped lower with some retracement. GBPUSD whipsawed finishing slightly below where it was pre Fed. 
  • S&P500 Futures pared an initial sell-off, trading back above 3,000. Similarly, ASX Futures whipsawed, now making a push for 6,700. 
  • Nikkei Futures gained on a weaker Yen.
  • Commodities edged lower across the board with Gold spot trading at 1,493 at time of writing.