- The upcoming rate decision by the Federal Reserve is weighing on global markets as participants take their profits home and consolidate their positions
- Although the market does not expect the Fed to start tightening tomorrow, the market will pay close attention to the accompanying statement
- USD/JPY is running out of steam ahead of the FOMC meeting and on the downside a weak support lies at 119.62
- NZD/USD is expected to trade sideways ahead of tomorrow RBNZ meeting that should leave its official cash unchanged at 2.75%, waiting for further economic data and other central banks’ decision to adjust its policy
Most Asian regional markets were trading in negative territory as the boost provided on Friday by the PBoC’s decision to further ease its monetary policy, wore off quickly. The upcoming rate decision by the Federal Reserve is also weighing on global markets as participants take their profits home and consolidate their positions. Although the market does not expect the Fed to start tightening tomorrow - probabilities extracted from the overnight swap rates show a 10% chance of a lift-off on Wednesday - the market will pay close attention to the accompanying statement, as there will be no press conference this time, to get a clue about the Fed’s thinking.
Only Chinese stocks managed to end up in positive ground. The Shanghai and the Shenzhen Composite edge up 0.14% and 0.65%, respectively. In Japan, the Nikkei 225 and the Topix index fell 0.90% and 1.02%, respectively; in spite of the fact that the BoJ is expected to increase its stimulus at its semi-annual meeting on Friday. Elsewhere, in Hong Kong the Hang Seng edged up 0.11%, while in South Korea the Kospi index fell 0.17%.
After breaking the resistance standing at 121.33 last Friday, USD/JPY is back below 121 as the greenback runs out of steam ahead of the FOMC meeting. On the upside, a resistance can be found at 121.75 (high from August 28th); on the downside a weak support lies at 119.62 (low from October 22nd), while a stronger one can be found at 118.07 (low from October 15th).
In New Zealand, the September trade balance was a major surprise. The trade deficit widened to NZ$1,222mn from a revised deficit of NZ$1,079mn in the previous month, well below market expectations for a smaller deficit of NZ$825mn. Exports fell to NZ$3.69bn in September, compared with a downwardly revised figure of NZ$3.71bn in August. While imports rose to NZ$4.91bn from an upward revision of NZ$4.79bn in the previous month. Exports of milk powder, butter and cheese (NZ largest export commodity group) fell 22%m/m but were party compensated by a rise in meat exports, which increased 33%m/m. Initially, NZD/USD fell sharply to 0.6757 before bouncing back and stabilising around 0.6780. The currency pair is expected to trade sideways ahead of tomorrow's RBNZ meeting. The Reserve Bank of New Zealand is expect to leave its official cash unchanged at 2.75%, waiting for further economic data and other central banks’ decision to adjust its policy.
***Yann Quelenn: “One month after the September FOMC meeting, which ended up with no monetary policy change, Fed members are gathering again. Traders will closely look at what will be declared as the power struggle between hawkish and dovish Fed members reaches a climax. While we do not expect any change in the current monetary policy, the minutes will be scrutinized to grab any hint about a further move.
We believe that no rate hike will happen this year with U.S. economic data printing mixed. It has been several months since the Fed announced a monetary policy normalisation, the end of the zero interest-rate policy. Slowdown in the global economy, and in particular in China, have, according to Fed officials, prevented a first rate hike, which would have been the first one in almost a decade. Janet Yellen declared that she is awaiting confirmation of U.S. recovery before making any move.
The Fed’s dual mandate to promote maximum sustainable employment and target inflation of 2% is for the time actually failing in its mission. Indeed the dollar-complex has constantly strengthened since the beginning of the year. The inflation pressures are not likely to stop. China is the country with the largest U.S deficit. As China debased its currency three times in August, the trade deficit with China is likely to widen even more. As a result, U.S inflation will stay low. The likelihood for a rate hike this year is almost null. Janet Yellen promised a 2015 rate hike. Her credibility is now crashing. Her hesitancy to act, to increase rates by a quarter point is sending completely the wrong signal. It is leading us to now properly wonder whether the U.S. economy is actually in a worse state than we have been lead to believe. In the foreign exchange markets, the EURUSD is likely to move on some Fed members’ declarations. We think that markets are expecting a proper timeframe for a rate hike. If this does not happen then the true state of the U.S economy will really be brought into question.”***
Today traders will be watching the Swedish trade balance and PPI; third quarter GDP from the UK; manufacturing PPI from Brazil; durable goods orders, Markit PMI, consumer confidence index, Richmond Fed manufacturing index and S&P/Case-Schiller index from the US.