FX Window Dressing For Quarter End

The last trading day of the quarter has given away to an Asian and Euro equity relief rally, not driven by fundamentals, but more than likely due to the various short covering and hedge fund “window dressing” demands. Either way, most of today’s intraday forex price moves will go unexplained. Nonetheless, the various risk-on flows are helping to drive cash out of the safe-haven JPY (¥120.20) and CHF ($0.9728) and into a number of persecuted commodity currencies (A$0.7032 and N$0.6392).

Bonds trade like a ‘hot’ commodity: Quarter end trading sees U.S Treasury’s under pressure from profit taking ahead of key data due out later this week (this evenings Chinese PMI and Friday’s U.S non-farm payroll). The safe haven rally that pushed U.S 10-year yields to a new monthly low (+2.05%) has persuaded the more prudent investor to take some profit off the table. Until the market gets a better handle on the U.S job situation this Friday, intraday moves are expected to remain capped from moving too aggressively in either direction.

Fed ‘ducks and dives’: Given the Fed’s recent history of revising its policy position, markets remain skeptical about the likelihood of a rate increase this year. The Fed had been saying for several months that it would raise the federal funds rate when the labor market approached full employment and when FOMC members could anticipate that annual inflation would reach +2%. But, although both conditions were met earlier this month, Ms. Yellen and company decided to leave the rate unchanged, explaining that it was concerned about “global economic conditions and about events in China in particular.” Benign U.S inflation has a number of fixed income dealers pushing the Fed’s first-rate increase in a decade out to March 2016.

Friday’s D-Day expectations: Will Friday’s highly anticipated fundamental releases provide the Fed a conclusive domestic reason to begin their rate normalization policy? Despite FOMC’s relatively hawkish collective rhetoric, the Fed remains at odds with dealers and investor thinking. U.S non-farm payroll (NFP) is expected to edge higher and print +200k vs. +173k. The national unemployment rate is anticipated to stand pat at +5.1%, while the average hourly wage is forecasted to dip to +0.2% from +0.3%. Will this be enough to shift the U.S yield curve higher and convince the masses that the Fed is to stick to its guns?

EUR on the retreat as EZ inflation turns negative: The EUR (€1.1203) is on the back foot ahead of the North Amercain session as data showed that eurozone inflation dipped back into negative territory this month (-0.1% vs. +0.0% y/y). This is fuelling market expectation that the ECB will expand (€60b per month) or extend its asset purchase program (Sept 2016) next month.

Abenomics 2.0: PM Abe has vowed to continue aggressive monetary easing and boost fiscal spending, promising to do “whatever is necessary” (an ECB coined theme) to put Japan’s economy on a robust growth path. He also claims that the deflation mindset that has plagued Japan for so long has been thrown off, and this despite the negative reading in the August national CPI data. USD/JPY seems to have found a temporary bottom (¥119.40) after two-days of yen risk haven support.

Japanese fundamentals are not helping Abe: Data overnight revealed that Japans industrial output fell for the third consecutive month against a market expected improvement (-0.5% vs. +1% e). This has prompted the Governments cabinet office to cut its assessment of production once again. Domestic retail sales were also disappointing (0.0% vs. +1%). Abe’s advisors are calling for a more aggressive policy response. The BoJ meet next Tuesday (October 6) and the fixed income market is pricing in further easing. But, will the BoJ be aggressive enough?

Fed’s inaction puts pressure on G7 Central Bankers: In September, a few central banks were unwilling to go it alone, preferring to see what the Fed had in store. Now that the September’s FOMC meeting has come and gone, there is now more pressure on G7 or G10 central bankers to be proactive. Next week there are a number of central banks rate announcements, starting with Monday’s Reserve Bank of Australia (RBA) down-under (October 5). Pressure is certainly mounting on the RBA’s Governor Stevens to cut interest rates in the wake of a gloomy report by the IMF that forecasts falling growth for commodity exporters. A rate cut would be unexpected; it’s not out of the question. On Tuesday, Governor Kuroda from the Bank of Japan (Oct 6) is expected to do something; the market disappointment would be if he were not aggressive enough. Regarding the Bank of England (Oct 8), it was only six-months ago that Governor Carney was considered the first major central bank to pull the rate trigger, and by year-end. Now, fixed-income dealers are pushing rate hikes further out the curve, to July/August of 2016.

Brazils real (BRL) remains in real trouble: The continued inflation pressures, caused by a plummeting BRL, are increasing the risks for a couple of rate increases by Banco Central Do Brazil (BCB). The commodity sensitive currency has managed to lose -25% of its value in the past three-months, printing a new intraday year high of $4.2482. Fixed-income traders are pricing in a +30% chance of a “mega” rate hike by year-end. Obviously, those odds are expected to increase if the currency continues to depreciate.

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