Forex trading ranges remain relatively tight for the time being, partly due to the lack of new fundamental data, regional holidays (Japan) and a market trying to get a better handle on central banks way of thinking. With investors requiring clarity, the Fed cannot afford to confuse. However, the unexpected equity market reaction to a “dovish” Fed now puts puts the ECB under pressure. With dealers now pricing in further QE, expect forex trading ranges to come under scrutiny.
U.S policy members are out in full force this week, and after Monday’s three-member comments, dollar support again seems to be back in vogue across the board. Providing the USD with further support on rate divergence trading is investors looking to European Central Bank (ECB) and the Bank of Japan (BoJ) to implement further easing as soon as next month (€1.1185, £1.5465, ¥119.82).
Remarks from regional Fed presidents Lacker (voting), Bullard (next year) and Williams (voting) indicate that many of the central banks objectives have been met and that this months FOMC rate decision was a “close call.” Bullard said there was a good chance of an October hike. Lacker, a dissenter at last week’s decision, warned that further delay of liftoff would be a departure from past Fed behavior. Dove Williams again argued that a little more patience was needed before raising rates. Overall, the Fed messages seem to have balanced last week’s surprising “dovish” announcement from the Fed. Fed Chair Yellen’s speech later this week (Sept 24) should be highly watched as the markets looks for a clear signal on policy. Fed fund futures see a possible hike on Oct 20 at less than +25%.
EU yields are under pressure after ECB policymakers hinted at their readiness to modify or expand their stimulus program should “market turbulence warrant further action.” Policy members are concerned that they may fall behind the curve as risks to both growth and inflation rise. Dealers expect the ECB message will be that rates will stay low as long as growth remains low. Will Draghi pull the rate trigger in October? Market is obviously looking for clues, but adjusting the QE timetable seems to be the obvious choice at the moment. The market will focus on the ECB president’s testimony on monetary policy to the European parliament tomorrow (Sept. 23).
Hungary’s central bank is expected to leave key rates unchanged today (+1.35%). With European migration concerns, investors should be focusing on the banks new economic forecasts (€310.50). Turkey’s central bank also meets and is expected to keep its rates on hold. Fixed income dealers are anticipating the bank to express its readiness to clamp down on inflation – above its +7% upper target band (€3.3800).
Update: Hungarian National Bank (MNB) is talking “loose” monetary conditions for longer. The CB has indicated that current levels of base rate is in line with their achievement of CPI goal and that inflation pressures are likely to remain moderate. The HUF a little weaker (€311.29) on these dovish comments.
Global equities continue to be squeezed by global growth and commodity worries. These concerns are providing support for both bonds and risk aversion strategies. Emerging assets are mostly affected from the likelihood of a Fed rate rise before year-end and on market expectations that tomorrow’s flash China factory PMI will show activity flagging near its seven-year lows.
Despite bonds being better supported, U.S yields are expected to come under pressure from this week’s supply of corporate debt issuance and U.S Government supply. The Fed’s decision to hold rates steady last week have opened a window of opportunity for companies looking to raise funds while rates remain ultralow. Up to +$30b of investment-grade debt could be on the table this week (last week there was only +$10b). The U.S Government is slated to auction $90b in 2’s, 5’s and 7-year notes (relatively short in duration so demand will be an issue). Dealers will want to make room to take down supply and this will require pushing benchmark bonds yields temporarily higher. However, investors should expect this to be a temporary phenoma, as weaker Euro and U.S equity markets will boost demand for safe haven debt. Lower eurozone bond yields will also support buying higher yielding U.S product (U.S 10’s +2.1514%)