Brainard rules the day?
While the primary focus overnight was the ECB’s latest musing and in summation, the Governing Council dispirited some in the market by not announcing an extension of QE. Also, while this explains some of the risks of price action, at the end of the day, it could be an unanticipated announcement that Fed member, Lael Brainard, will speak on Monday, September 12 at 1:00 PM ET that may have sparked the biggest reaction along the US STIRT curve overnight.
The main upshot for the ECB was the Governing Council is prepared to sit on their hands while weighing options on inflation expectations as well as the efficacies of their QE programs.Brainard’s unscheduled meeting has traders second-guessing themselves regarding of chances for the Fed to hike rates in September, and as unlikely as that may seem, I suspect the shift in USD sentiment was more about positioning and a likely underpriced September Rate hike probability as it was about any other underlying factor.
The ECB had little impact on USDJPY, but the repricing in the Fed rate hike probabilities primarily drove the move above 102 .00.
The technical break of 102-triggered stops and the pair had gapped to 102.59 before sellers emerged. Adding to the momentum may have been the exuberance in the oil patch, which rallied energy stocks.
The fallout from the ISM miss was wearing thin yesterday, and I think some overextend short USDJPY positions coupled with the fact that that the September rate hike probabilities at 15% were likely much lower than reality. Overall, the move higher in the USDJPY, especially given the huge risk events surrounding the BOJ and FOMC later in the month is not all too surprising.
Confirming the API data earlier in the week, according to the EIA Crude Stocks report there was a massive drop of 14.51 million barrels, which fuelled a 4% gap higher, despite a warning from the EIA that crude stocks were at historically high levels for this time of year. However, I think the main reason for the move was that the OPEC meeting came up on traders’ radar in that that any reason for short covering appears to be one for good cause.
The jump in Hibor rate had seen traders scramble to reduce short CNH funding as well as speculative positions for fear of a repeat of January when the Hibor rate unexpectedly gapped to 66% as the PBoC’s iron hand took charge and thwarted overzealous speculation on the Yuan.
It is a bit unclear this time around if it is stealth currency intervention or just a short squeeze on funding costs heading into the weekend. I suspect there is some merit on both points, but the PBoC will likely keep the currency on a tight leash through October’s SDR entry.
It is getting increasingly more complex to have a stake on either side of the currency debate. On the one hand, with the high China Trade data, firming Industrial metals complex and a USD dollar that appeared all but down for the count and given the numerous moving parts to this complex equation, it does not take much to tip the apple cart.
By all appearances, Aussie traders were trapped in a mini risk off vortex with the primary catalyst the ECB that surprised most everyone by not extending the QE program at this time. However, fuel was added to the fire when the September Fed rate hike probabilities rose marginally, but 10-year Treasury yields climbed five bps. Traders are hedging their bets leading up to the usually very dovish Governor Brainard’s speech on Monday. If she comes across with a unified stance on the September Fed lift off, it could add a lot of credibility to the September rate hike debate.