USD retreats on heightened geopolitical tensions, China drone seizure

• USD retreats on heightened geopolitical tensions
• Broader themes unchanged; USD upside risks remain after a hawkish FOMC
• Focus this week on the Bank of Japan’s MPM

via Barclays

The USD pulled back on news of heightened geopolitical tensions over China’s seizure of a U.S. naval drone, with USDJPY trading to 116.97 this morning (c.-1.5% from the Bloomberg high). Nevertheless, broader themes remain unchanged after the FOMC’s subtle hawkish signals regarding the outlook of monetary policy last week. Risks now remain tilted for the USD toward a sharper appreciation in the months to come

Markets will increasingly focus on US economic policy prospects including trade reform and fiscal and immigration policies with attention turning to the FOMC minutes (January 4) and the first US employment report of the new year in the US (January 6)

For this week, Chair Yellen will speak at the commencement address at the University of Baltimore (this evening at 18.30). Barclays Research “…does not anticipate a direct monetary policy discussion, but it is likely that the job market is going to be discussed…”

Despite the short-term sell-off this morning, USDJPY is poised to finish 2016 as the year of the great round trip, with the pair declining from 120 to 99 just after the Brexit vote and almost fully reversing this move after the US election and the hawkish Fed hike

Focus will be on the Bank of Japan’s economic assessment and the Kuroda press conference this week (especially his responses on rising JGB yield and yield curve control). Barclays Research expect an upward revision to its economic assessment but do not expect any monetary policy action

Today’s currency rates