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Chart of the Day: USDJPY

Despite all the crazy moves taking place in the repo and oil markets, traders need to position and manage exposure ahead of tonight’s FOMC meeting (4 am AEST). The Federal Reserve will cut rates by 25bp. It isn’t just fully discounted, but there’s a 15% chance of a deeper 50bp cut, so it seems assured they’ll ease. If they don’t, however, then expect the USD to absolutely fly and equities and gold to be punished.

USDJPY daily

We also need to consider if the Fed cuts the interest earned on excess reserves (IOER), which, along with further measures to calm the repo market, could have huge implications in the funding markets. Whether this is a driver of FX volatility, however, is yet to be seen. I’d be more focused on future expectations of Fed action and, subsequently, whether the Fed gives a strong case for another 25bp cut this year. The tone and level of concern on the US and global economy are potentially where we’ll get the biggest reaction in US Treasurys, gold, equities and the USD.

Trading the meeting is incredibly difficult, and the prospect of outsized moves is elevated. My own view is the risks to the USD are skewed to the downside, especially we see the Fed target liquidity in the US money markets, which could negatively impact the USD. USDJPY will be one of the purest plays on the Fed meeting, so it’ll be firmly on the radar.

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