Lull Before the Storm

Lull Before the Storm?

It’s been an incredibly quiet start to the week as most currencies remain rangebound, but don’t let this sense of calm fool you, markets may be poised to explode. There is a  multitude of macro themes dominating the current Forex landscape, a Fed hike, ECB, and  BoJ tapering fears, and of course the US Elections. There is also an OPEC meeting and the China Monthly data dump to navigate; investors have a real challenge on their hands trying to counterbalance these multiple inputs.


On the Fed speak front, Vice Chair Stanely Fisher gave us nothing fresh and merely reiterated his long-standing mantra that the Feds were close to achieving its two targets.


Australian Dollar


The commodity currencies traded quietly overnight. The Oil rally ground to a halt post the significant drop in the NY Empire Manufacturing Index coupled along with the overhang from Friday Baker Huges Rig count increase.

Governor  Lowe gave his first speech as the RBA Governor this morning. As expected he did not deviate from the neutral RBA track and sounded rather bullish about the economy. He was not overly worried on the inflation front.

The AUD was unaffected by his speech.

With major event risk looming for the Aussie dollar, local traders were treading lightly early in the session. But given the neutral stance in the RBA Monetary Policy Minute’s coupled with some positive move in risk this morning,  we could see the Aussie dollar supported throughout the session.

The  AUD is picking up some tailwinds from the better than expected inflation print in New Zealand this morning.


New Zealand Dollar


Q3 CPI came in higher than expected at 0.2% QoQ vs. expectations of no change. The NZDUSD jumped from  0.7135 to 0.7180. The larger print will likely see some subtle repricing of the November rate cuts bets so we could see the NZD supported on dips in today’s session.


Japanese Yen

USDJPY trades back to the 103’s as the current landscape is completely dominated by the US Bond Market moves.  So far USDJPY traders remain confident buying the dips at least until the critical 103.25 is touched.


Current Macro  Themes 


December Fed Hike and what lies beyond.


The USD is still King as the December Fed rate hike probability presses near 70 %, as the market moves closer to an all in move despite the persistent weak inflation and sluggish wage growth. The minutes from the last Fed meeting in September point to a strong case for a USD rate hike. While this  base case scenario remains intact provided there is is no  significant blemishes in upcoming economic data releases; I think it’s all but a done deal


The real debate centers on 2017 and what lies in store beyond. Last Friday Dr. Yellen may have given us a glimpse into her progressive outlook, which implies allowing both inflation and growth to overshoot current targets, denoting that only a very gradual rate hike will be in store for 2017 and possibly beyond.


ECB and BoJ Tapering Angst


It’s incredible how the bond market has turned on a dime. In late August traders were concerned with stagnation. Investors were buying up any and every long-dated note. Today, however, we’re now in a situation where concerns about the end of easy money dominate trader’s psyches.


As for the BOJ, I think it’s a case of sheer confusion further highlighting the crisis of credibility the BoJ now faces. Not surprisingly the USDJPY has become a bit of a sideshow in recent days, and I expect  JPY to trade on the back of the US interest rate probabilities and risk aversion through the US election build-up.


In my view, this puts the ECB Press Conference on Thursday center stage this especially with all the speculation last week about the ECB tapering their  Asset Purchasing Program.


My four likely tangents are Draghi, and the ECB could veer.

1) The ECB will kick the can to December leaving traders in a quagmire of uneasiness for another 60 days or so.

2) ECB goes on a  bond-buying spree by lifting the self-imposed ban on buying bonds yielding less than its deposit rate.

3) The  ECB  floats the idea of reverting the original QE plan of 60 bln Euro, however, given fragile EU  banking system this may be unlikely.

4)  The ECB extends the current program by 9-12 months.


None the less, lots of attention will be afforded to Draghi comments as the market gauges a possible dovish stance by the ECB.



China  Monthly DATA dump


Today’s China monthly data dump will certainly attract attention, given last week’s deplorable trade data. The current forecast is 6.7 %, on pace with the first and second quarters. After a shaky start to the year, the Chinese economy has stabilized thanks to easy money policy and massive infrastructure builds.

However, China’s currency conundrum is coming to the fore in the wake of last week’s trade numbers. Certainly, the PBOC would welcome a weaker currency, as would most central bankers. The question is, what systemic costs could they bear as Capital outflows are likely to accelerate.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes