[ForexNews]

The USD rally yesterday was partly related to the rise in US yields, but this did not appear to be the only factor, given that the GBP and JPY performed as well as the dollar. Position cutting probably played a role, with popular longs such as commodity and EM currencies coming under pressure, although this was at odds with the resilience of the AUD relative to less cyclical currencies such as the EUR. Equities were weak but less so than the moves in FX would suggest, while commodity prices came under significant pressure alongside the dollar appreciation. Yesterday's moves were broadly consistent with concerns about the withdrawal of liquidity but market analysts do not expect these concerns to last and are sticking to the bullish risk-correlated currencies and weak USD views. The fundamental picture continues to be bullish for risk-correlated currencies. Data out of China last week were strong and policymakers globally (with the exception of a few central banks) continue to suggest that it is too early to withdraw stimulus. The measures of risk also continue to suggest a carry-trade-friendly environment.

Upside risk for AUD tomorrow

Tomorrow RBA Assistant Governor Edey will continue with the RBA’s hawkish rhetoric and, together with a potential upside surprise in inflation, put a 50bp rate hike in November back on the table. The bills market is currently priced for 28-29bp worth of hikes in November. Market expects the domestic data over the coming weeks to continue to come out strong and support the case for further rate increases by the RBA, which will also encourage hawkish rhetoric from RBA Governor Stevens, and at the MPS.

MPC's Posen dismissed QE inflation concerns

MPC member Adam Posen delivered typically dovish comments yesterday, saying that concerns that QE would ignite excessive inflation were not supported by the empirical evidence. He said the greater concern was that the UK's financial system would be unable to sustain a recovery and that the depth and breadth of corporate credit markets needed to be improved. The latter was a matter of urgency because the ability of policy to support demand was time-limited. At the same time, he did not unequivocally indicate his support for a further extension of QE at next week's MPC meeting. He said that aggressive policy action meant the UK had avoided the worst-case scenarios for growth. Moreover, he believed that there were signs that QE was facilitating a recovery, and that there were other considerations for the MPC's forecast than just last week's GDP surprise. FX Traders remain positive on GBP over the medium term, but would not recommend buying it ahead of next week's uncertain rate decision.

[ForexNews]

Overnight the Dollar continued to be well bid as Asian markets caught up with yesterday’s selloff in equities. With the S&P closing below a key technical level (1069) saw risk reduction across the board as EUR, AUD, and NZD were all offered. EM currencies also sold off on the weak risk sentiment as people covered shorts. With little news to point towards as the direct cause, this pullback seems largely to be driven by general risk reduction and squaring of positions. On the data front today the focus is on the 2Y UST auction as well as the Case Shiller Index and Conference Board Consumer Confidence. Market is expecting further improvements in housing prices and a slight softening in consumer confidence. Also later tonight watch out for the Australian 3Q CPI which will have important implications for RBA rate hike expectations and the AUD.