View from the FX Dean: Tuesday September 15, 2015
Market sentiment remains split as to whether the Fed will implement its first rate hike in a decade or deliver a “hawkish hold” (term coined by Deutsche bank) on Thursday. Some dealers have been paring back their long USD exposure over the past few weeks (DXY: 95.20 trading atop of its three week low) in anticipation to a small negative dollar reaction to a “no” change. Most of the USD long positions have been predominately against EM currency pairs.
A pair of “doves” or “hawks”: It would not be a surprise to see at least one member dissent on either a hike or hold scenario this Thursday. Current speculation has Chicago Fed chief Evans dissenting on a hike, while Richmond Fed chief Lacker is the most likely candidate to be voting against keeping rates near zero if the Fed remains on hold. What about two doves? Their existence would make the rate bar much higher, while a pair of hawks should increase volatility by keeping the threat of forthcoming rate liftoff within fixed income dealers’ crosshairs.
Not making it any easier for the Fed is that inflation expectations seem to be going in the wrong direction. The NY Fed yesterday reported that one-year ahead expected inflation faded to +2.8% from +3% in August, while three-years ahead eased to +2.9% from +3%. It’s neither significant, nor insignificant; however, if it persists it will have a greater bearing on monetary policy.
The Fed needs to preserve its street cred: The Fed has managed to balk at a rate hike a number of times over the past six-years. The problem for Ms. Yellen is that she has been very vocal about a rate liftoff happening in 2015. The longer that U.S policymaker’s back off from tightening, the more event risk excuses begin to pile up and the more distrust investors will have for Ms. Yellen and company.
Lost in translation – follow the “Dot plot”: It does not matter what the Fed will do this week; investors will need to decipher a fresh set of Fed fund projections to shape market expectations for upcoming monetary policy meetings. The “dot plot” will project where future interest rates will lie for the remainder of this year, next year and in 2017. By Thursday afternoon investors should have a better understanding that any Fed tightening will only ever be gradual.
Yen (¥119.56) has gained after the BoJ refrains from expanding its stimulus program. Governor Kuroda maintained the banks annual monetary expansion target at +¥80t as widely expected, but cut its assessment on both exports and industrial production (IP) to “more or less flat due to effects of slowdown in emerging economies”. It was always going to be difficult for any of the major central banks to preempt the Fed this week.
Political bloodless coup down-under: Australia witnessed a party coup yesterday, as Liberal Party member Malcolm Turnbull ousted sitting Prime Minister Tony Abbott. In recent months, the former PM seemed to have lost the publics confidence as expressed in various opinion polls. The handover has gone smoothly overnight with PM Turnbull formally sworn into office. Both Moody’s and Fitch noted that Australia’s sovereign ratings would not be impacted, despite the country’s rising economic and fiscal challenges.
Antipodean currencies little changed: Both the AUD ($0.7127) and NZD ($0.6330) are holding their recent gains as investors seem reluctant to make any big bets ahead of Fed. The RBA released its September policy meeting minutes overnight. The tone was considered more “dovish” than anticipated. Policy members said they saw a “rising downside risk to global growth outlook, with headwinds coming from anticipated Fed rate hike and China capital outflows.” RBA added growth would remain below average, though it was optimistic of improvement in non-mining business.
Sweden Central Bank (Riksbank) Deputy Governor Jansson reiterated their view that monetary policy was having effect and was important that inflation continued to rise. The Riksbank could not permanently keep SEK ($8.2377) weak and would like to see “gradual appreciation of currency.” The Deputy Governor indicated that SEK currency intervention remained a tool of the central bank and has been discussed in the past.
WTI crude is around the lower end of last week’s range, trading $44.30 this morning. OPEC released its monthly report yesterday, in which it revised its 2015 world oil demand growth forecast to +1.46m bpd, up +84k bpd mainly to reflect better-than-expected data from OECD region. For 2016, OPEC sees world oil demand rising by +1.29m bpd after a downward revision of around -50k bpd. Members have again warned that weakening economic performance in India and China could further reduce global crude prices.
Euro data does not excite: U.K CPI headline inflation this morning fell back to +0% in August from +0.1% in July as expected. Headline prints like this will do very little to change the BoE’s interest rate debate. Sterling continues to trade near its recent highs (£1.5430), while the euro (€1.1300) remains relatively unfazed that Germany’s Sept ZEW current situation survey registers its third consecutive month of improvement (67.5 v 64.0e). Perhaps this mornings U.S retail sales release can get investors more interested?