Sean Callow, Research Analyst at Westpac, suggests that if markets do start to price in a path for the funds rate somewhat closer to the outlook of the Fed itself, it should boost USD across the board and this would be particularly welcome in Japan. Key Quotes “If concerns over China’s financial markets do continue to abate, there should be scope for investors to place greater weight on US economic data in pricing the outlook for US monetary policy. After Yellen’s testimony and worries over European banks earlier in the week, Fed funds futures did not fully factor in another rate hike until Dec 2017. Westpac in contrast looks for tightening to resume in June 2016. USD/JPY has fallen a staggering 9 yen from the post-negative rates highs on 29 Jan. Not only does this surge in the yen not align with economic fundamentals, it doesn’t even fit very well with global sentiment, with the S&P 500 avoiding a break of Jan lows but USD/JPY crashing to lows since Nov 2014. This brings back memories (or nightmares) of e.g. 1995, 1998 and 2008 - sharp rises in the yen are very rarely (never?) benign. So short term at least, USD/JPY rather than USD/CNY is the currency pair the Fed should be watching. Part of the message of the price action is surely that many investors don’t believe the message Chair Yellen delivered to Congress this week. For AUD, the fragility of USD has allowed AUD/USD to avoid deeper losses from the overall shaky global mood. Multi-month, this is a probably a temporary reprieve for the Aussie, as we expect the US dollar to rebound for the “right” reasons.” For more information, read our latest forex news.