Risk appetite started strong in Asia, but weakened as Europe walked through the door.
Volatility in USDHKD continues to surges as HKMA withdrew excess liquidity from the banking system by offering additional $HK40bn of exchanges bills. The HKD market was caught short, which has been used as a funding currency in carry trades, caused USDHKD to fall sharply. However, the influence on rates and liquidity is questionable, suggesting USDHKD will likely move back about 7.82.
In Japan, Japan’s PM Shinzo Abe confirmed that snap elections were on the table (October 22nd is rumoured to be the proposed date). PM Abe's rating has recovered over public worries over North Korea and disarray in the opposition Democratic Party. For the market the focus will be on the fate of Abenomics, which is connected to the ruling party. USDJPY rally to 111.70 has been supported by the expectation of another Liberal Democratic Party (LDP) win, which will extend Abenomics. FX traders will be watching the polls cautiously, should Abe popularity wane, and watching for JPY to gain strength.