View from the FX Dean: Thursday September 10, 2015
Currency prices continue to be held captive by central banks monetary policy expectations and decisions (this week’s BoC, BoE and RBNZ and next week’s BoJ, SNB and Fed) and by global equity prices moves influencing either risk ‘on’ or risk ‘off’ trading strategies.
Current market volatility remains very high amid heightened uncertainty about global growth-VIX +5.33% to 23.56
All eyes on the “Old Lady:” GBP (£1.5392) is relatively quiet ahead of the BoE rate decision at 7am EDT. The MPC is expected to keep policy unchanged (investors will be focusing on the immediate release of the minutes and the vote). Last month recorded this year’s first dissident vote (8-1) to keep interest rates steady (Jan-July 9-0). The fixed income market will take its cue from the vote, if the vote happens to return back to 9-0 it will be assumed that Governor Carney will most likely delay the BoE’s first rate hike until at least H2 2016, if so, then GBP could come under considerable pressure.
Global bourses are on the defensive again overnight and mirroring yesterday’s aggressive selling stateside that was pressured by the record high JOLTS jobs print (+5.75m vs. +5.30m). Depending on what side of the debate your are on, for any U.S “hawk” the headline print provides further evidence for the Fed to being their rate normalization policy as early as next week.
China wants to avoid a currency war. The world’s second largest economy has been going to great lengths to undo some of the damage that its currency devaluation has inflicted on the global economy last month. Overnight, China’s Premier Li indicated that he wants to avoid a currency war and reiterated that Chinas economy still faces downward pressure even though it operates in a reasonable range. He said China would maintain basic policy direction. Verbal intervention has been helping to stabilize market moves and systemic risk.
China inflation data dominated a busy overnight economic calendar. August CPI hit a one-year high of +2%, driven by food CPI rising to +3.7% vs. 2.7%, as non-food component remained little changed at +1.1%. USD/CNY: PBoC set the yuan mid-point at ¥6.3772 vs. ¥6.3632 prior setting – it’s the weakest yuan setting since Aug 31st.
Reserve Bank of New Zealand (RBNZ) flatfoots markets: The RBNZ cuts rates for the third consecutive time this year as expected. Nevertheless, they have surprised investors by flagging further easing with a more “dovish” than anticipated policy statement. Governor Wheeler said some further easing in OCR (overnight cash rate) is warranted and further depreciation of exchange rate was appropriate (NZD$0.6303), as it revised its GDP, CPI, and 90-day bill rates lower. Fixed income dealers have been pricing in additional RBNZ easing ever since.
Not guilty by association is the AUD ($0.7078). Obviously rate differentials favor the Aussie dollar vs. the Kiwi, but this morning’s employment data down-under, which was slightly better than expected (+17.4k vs. +5k e; unemployment rate +6.2%) is aiding the currency.
Yen remains under pressure outright on market expectation for a further divergence in monetary policies of the U.S and Japan (both central banks meet next week). USD/JPY has broken through the psychological ¥121 handle overnight as LDP party official Yamamoto (an ally of PM Abe) called on the Bank of Japan (BoJ) to boost QE in late October so as to ensure Japan inflation objectives could be met. Aiding his argument is Japan’s disappointing forward-looking machine orders data print (-3.6% vs. +3% m/m). The surprise decline has prompted the government to cut its assessment of the sector.
No surprises from Scandinavia: The Nordic region (Sweden and Norway) August inflation reports were better than expected and this seems to have cooled calls for near term rate cuts for both the Riksbank and Norges. The SEK ($8.4070) and NOK ($8.1884) currencies trade somewhat steady.
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