Lull Before the Storm?
It's been an incredibly quiet start to the week as most currencies remain rangebound but don't let this sense of calm fool you as markets may be poised to explode. With the multitude of Marco themes dominating the current Forex landscape, Fed hike, ECB, and BoJ tapering fears, US elections. OPEC and China Monthly Data dump to navigate; investors have a real challenge on their hands trying to counterbalance these multiple inputs.
On the Fed speak front, Vice Chair Stanely Fisher gave nothing fresh and merely reiterated his long-standing mantra that the Feds were close to achieving its two targets.
Overnight Commodity currencies traded quietly overnight as Oil price rally ground to a halt after the significant drop in the NY Empire Manufacturing Index
coupled the overhang from Friday Baker Huges Rig count increase fresh in traders minds.
Governor Lowe gave his first speech as the RBA Governor this morning and as expected did not deviate for the Neutral RBA Tack and sounded rather bullish about the Economy and was not overly worried on the inflation front. The Aussie dollar was largely unaffected by his speech.
With major event risk looming for the Aussie dollar, local traders were treading lightly early in the session. But given the neutral stance in the RBA Monetary Policy Minute's coupled with some positive move in risk this morning, we could see the Aussie dollar supported throughout the session .
Also, the Aussie is picking up some tailwind from the better than expected inflation print in New Zealand this morning.
New Zealand Dollar
Q3 CPI came in higher than expected at 0.2% QoQ vs. expectations of no change. The NZDUSD jumped from 0.7135 to 0.7180. The larger print will likely see some subtle repricing of the Nov rate cuts bets so we could see the KIWI supported on dips in today's session.
USDJPY trades back in the 103's as the current landscape is completely dominated by the US Bond Market moves, but so far Yen traders remain confident buying the dips at least until the critical 103.25 is touched.
Current Marco Themes
December Fed Hike and what lies beyond.
The USD is still King as the December Fed rate hike probability presses near 70 % as the market moves closer to all in move despite the persistent weak inflation and sluggish wage growth. The minutes from the last Fed meeting in September point to a strong case for a
USD rate hike. And while this base case scenario remains intact provided there is is no major blemish in upcoming economic data releases; I think it's all but a done deal
The real debate centers on 2017 and what lies in store beyond.Last Friday Dr. Yellen may have given us a glimpse into her progressive outlook which implies allowing both inflation and growth to overshoot current targets denoting that only a very gradual rate hike will be in store for 2017 and possibly beyond.
ECB and BoJ Tapering Angst
It's incredible how the bond market have turned on a dime. In late August traders were concerned with Stagnation with investors hoovering up any long-dated note. Today, however, we’re now in a situation where concerns about the end of easy money dominate trader's psyche.
As for the BOJ, I think it's a case of sheer confusion further highlighting the crisis of credibility the BoJ now face. Not surprisingly the USDJPY has become a bit of a sideshow in recent days, and I expect JPY to trade on the back of the US interest rate probabilities and risk aversion through the US election build-up.
In my view, this puts the ECB Press Conference on Thursday center stage this especially with all the speculation last week about the ECB tapering their Asset Purchasing Program.
My four likely tangents Draghi and the ECB could veer towards are:
1) The ECB will kick the can to December leaving traders in a quagmire of uneasiness for another 60 or so days.
2) ECB goes on a bond-buying spree by lifting the self-imposed ban on buying bonds yielding less than its deposit rate
3) The ECB floats the idea of reverting the original QE plan of 60 bln Euro, however, given fragile EU banking system this may be unlikely and
4) The ECB extends the current program 9-12 months
None the less, lots of attention will be afforded to Draghi comments as the market gauges a possible ECB less dovish lean.
China Monthly DATA dump
This week's China monthly data dump will certainly attract attention given last weeks deplorable Trade Data. Current forecast is for GDP is at 6.7 % on pace with the first and second quarters. After a shaky start to the year, China economy has stabilised thanks to easy money policy and massive infrastructure builds.
However, China currency conundrum is coming to the fore in the wake of last week Trade Numbers. Certainly, the PBOC would welcome a weaker currency as would most central bankers, but at what systemic costs could they bare as Capital outflows will likely accelerate.