FOREX: The Euphoric Dragon Boat Ride Has Taken A Sharp U Turn

Today, the Australian dollar took a hit as the worst-performing G10 currency, as traders were left underwhelmed by China’s National Development and Reform Commission briefing. The market was hoping for a stimulus bazooka from Beijing, but instead, they got a damp squib. On top of that, the Aussie weighed down by the release of the RBA’s September 24 meeting minutes. The removal of language stating that a rate cut was “unlikely in the short-term” set off a flurry of rate-cut speculation. Traders are now pricing over a 50% chance of a 25bps cut by December, leaving the Aussie on shaky ground.

Here is my press release note on China’s market reopen:

After what was hyped as the "mother of all catch-up bounces," China’s market rally has hit a wall, leaving investors deflated. The reopening surge from the week-long holiday barely had time to gather steam before fizzling out, and now the once-thrilled bulls are licking their wounds. The rally has stalled with fresh stimulus nowhere in sight, and the euphoric "Dragon Boat" ride has taken a sharp U-turn.

Tuesday’s press briefing from China’s top economic planner, the National Development and Reform Commission, was supposed to be the big moment when Beijing unleashed a stimulus bazooka. Instead, it was more of a pop gun. While officials paid lip service to hit their economic targets and promised vague "further support," there was no meaningful policy boost. The market reaction? Immediate disappointment. Hong Kong stocks tumbled from boom to bust in a heartbeat, leaving traders scrambling to figure out what’s next.

It’s clear the market wanted more, and Beijing’s reluctance to roll out a bigger package is raising serious doubts about the sustainability of this rally. With global risk appetite already on shaky ground, China’s lack of decisive action could be the pin that bursts the bubble. A historic moment may be looming for Chinese equities, but instead of the rocket fuel investors were hoping for, they're getting the market equivalent of a flat, day-old soda. Traders are watching closely, but this rally may have already peaked without a serious commitment from policymakers.

Meanwhile, the US dollar flexed its muscles, staging its most robust rebound since the bearish trend started in July. Geopolitical tensions in the Middle East have lit a fire under the greenback. With the market on edge, awaiting Israel's response to last week’s missile strikes from Iran, crude prices have surged near $80/barrel as traders bake in a premium for potential supply disruptions. The timing couldn’t be more pivotal, with US elections around the corner—some believe this flare-up could play right into Trump’s hands as he eyes a second term.

In addition, the threat of another trade war looms over emerging market currencies, particularly in Asia and Latam, and the USD is riding high. The icing on the cake? A blockbuster nonfarm payrolls report for September has shifted market expectations toward a smaller, more measured 25bps cut from the Fed in November, right after the election. The dollar’s bullish case is stronger than ever.

In contrast, the yen is doing something a bit surprising—it's gaining strength. While the dollar has been buoyed by hawkish Fed repricing and dovish signals from other central banks like the ECB and BoE, the yen has defied gravity, likely in part because those dovish signals are weighing on the European /jpy crosses today.

Japan’s weak inflation data, usually seen as a negative, may now be positive for the yen as it raises expectations for a massive government stimulus package. Japan’s real wages in August fell 0.6% year-on-year, marking the first decline in three months, with traders speculating that the Japanese government will step up with more aggressive measures to boost the economy. ( we will keep an eye on “ bad news is good news “ for the yen)

On top of that, we could witness a "Trump jump" in the yen, with the former US president gaining ground in the betting polls. Remember Trump’s recent complaint about the strength of the dollar, where he specifically called the Japanese yen a “big currency problem." With him back in the spotlight, traders may start recalibrating their expectations, and the tides could shift again. If Trump continues to push his agenda, it could put renewed upward pressure on the yen, causing another round of volatility in the FX markets.

At the same time, the long USDJPY trade vs higher oil prices is starting to feel a bit stale.