Dollar and Sterling Get Direction

Strap in and be prepared for opportunities, as this is a big week for investors and capital markets. Geopolitical events, a few central bank meetings, and the Scottish referendum are supporting the recent uptick to both volume and volatility, especially in the forex asset class. The U.S. dollar remains king, as both the currency and global yields rise ahead of the Federal Reserve’s two-day meeting. Market consensus expects this week’s Federal Open Market Committee (FOMC) meet will be a hawkish event, especially following Friday’s solid U.S. retail sales data (+0.6%) for August that was supported by positive revisions to previous months. Moreover, better-than-expected University of Michigan sentiment data has added to the market’s conviction (84.6).

The Reserve Bank of Australia (RBA) will kick-start the week with its Monetary Policy Meeting minutes being released this evening. The RBA held its benchmark steady at a record +2.5% for the thirteenth consecutive month at its last meeting. Many believe that was a mistake, arguing that Governor Glenn Stevens should be more aggressively confronting the weakness in the Aussie economy and its high unemployment rate. A less dovish Fed has been persecuting the carry trades despite a supporting Aussie jobs number last week. Aiming to guide the Aussie lower (AUD$0.9008) is China’s industrial output, which slowed (+6.9%) to a six-year low over the weekend, and renewing fears of a hard landing from the world’s second-largest economy. Even retail sales slowed to a four-month low while fixed investment growth is down at a multiyear low rate.

Yen Weakness Helps the BoJ

On Tuesday, investors will also attempt to decipher interest rate clues from a speech the Bank of Japan (BoJ) Governor, Haruhiko Kuroda, will make. Currently, they are looking for any sign that Prime Minister Shinzo Abe is pushing for further monetary stimulus. Many have been expecting the BoJ to ramp up its stimulus program in the face of revived deflationary pressures, and amid an economic slowdown worsened by a drag attributed to a hike in the sales tax. However, with the yen undergoing its own sharp decline (¥107.24), it is certainly doing some of the stimulus work for Kuroda.

Last month’s German ZEW index of economic sentiment hit a 20-month low, and on Tuesday morning the market forecast is for an even bigger drop. This would suggest that the mood among the German population is only getting worse to domestic deteriorating growth, mounting eurozone deflationary pressures, and the general squeeze caused by European Union and U.S. sanctions on Russia over Ukraine. The EUR received solid support last week from heavy unwinding of EUR-funded carry trades, and by Friday’s close, it was the best performing currency for the week (+3.75%) against the AUD and up +0.15% versus the USD. The market should be expecting the single currency to see some further consolidation ahead of Wednesday’s FOMC decision where the market expects the Fed to be less dovish.

Payrolls to Influence the Fed

Wednesday is another data-laden day. Investors get a peek at the Bank of England’s (BoE) Monetary Policy Committee meeting minutes. On September 4 the BoE left policy unchanged, but the vote was split 7-2. If there is any hint that any one of the seven policymakers are leaning toward tightening, then the market will be quickly recalibrating its tightening bias, despite Carney’s latest efforts to talk down any near-term U.K. rate increases (£1.6246). In hot pursuit will be the eurozone’s consumer-price index for August. It’s one of the biggest influences on European Central Bank (ECB) policymaking. Recently, it’s been on an alarming slide toward deflation and reason enough why ECB boss Mario Draghi and company acted earlier this month by cutting rates and introducing a bond-buying program.

A fear of the Fed taking a more hawkish stance at its two-day meeting that ends next Wednesday is keeping both European and U.S. bond yields elevated. U.S. policymakers are expected to shed some light on plans to raise interest rates. The market will be focusing intently on the FOMC press conference after the federal-funds rate decision. Before this meeting, the market has an especially disappointing payrolls report (+142k), which is expected to support Fed Chair Janet Yellen’s hesitance to rush toward a rate increase next year. However, there are other signs of robust growth, so there is a chance that U.S. policymakers could signal on that. It should keep the market on its toes.

Scots Need a “Braveheart”

Scottish referendum fever continues to grip market price action, and though the odds for the country to vote to leave the U.K. has lessened, sterling’s fate rests on next Thursday’s vote. Official results will be made known on Friday and the outcome remains too close to call. Sterling, which last week plummeted to a new 10-month low (£1.6035) after a poll slightly favored independence, is trading in a tight range as we start the week (£1.6245). Expect things to heat up again as the week progresses.

Also on Thursday, the Swiss National Bank (SNB) will set its Libor (London Interbank Offered Rate) though no changes are expected. However, Swiss authorities could be put to the test if the EUR’s downfall escalates and encroaches on the two-year-old EUR/CHF floor at €1.2000. There is no reason to assume the appetite for SNB intervention is diminished at this point. In fact, the pressure for action has intensified.

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