- Deutsche Bank uncertainty around the final penalty will continue to weigh on equity market sentiment
- US crude prices were unable to hold the $50 handle as the US rig count continues to increase and the producer meeting in Istanbul is not expected to result in any production reduction agreement
- While volatility in FX is rising we expect that any USD rally will be unsustainable, especially against high yielding EM currencies
- Polling has Donald Trump at 20% probability of winning the US elections and as this number shifts a long basket of JPY, USD and short CAD, MXN and CNY will continue to gyrate
- Selling pressure remains steady on the GBP and economic data indicates that the British economy is slowing
- Fed: From our vantage point, a (likely) December rate hike will be done simply to boost the central bank's credibility, especially as now its dual mandate, low unemployment and price stability, looks at stake
FX markets were subdued in the Asian session. USD was marginal stronger against G10 and EM currencies. The primary trigger was US presidential-hopeful Donald Trump being able to drag Hillary Clinton down into the mud to salvage his campaign (reversing earlier risk rally on decreasing Trump presidential chances due to lewd video).The Hong Kong stock exchanges, Tokyo and Taipei were closed Monday because of a holiday, decreasing trading flow. Currency markets continue to show a heightened sensitivity to US elections. The Shanghai composite rose 1.19% while the rest of Asia was mixed. Despite Deutsche's top people in Washington DC to reach a deal with the DoJ there is yet to be any sentiment. The uncertainty around the final penalty will continue to weigh on equity market sentiment. US crude prices were unable to hold the $50 handle as the US rig count continues to increase and the producer meeting in Istanbul is not expected to result in any production reduction agreement. WTI fell 1.3% to 49.70 brl. The weak crude price sent USDNOK to 8.12 from 8.02. Elsewhere, the PBOC set USDCNY mid-point at 6.7008 against a prior fix of 6.6745 - the lowest level since Sept 2010
In the US, weaker then expected US job data released on Friday was not soft enough to completely remove expectations for a December Fed rate hike. The payroll report indicated that NFP climbed by 156k in September from an increase of 176 in August. The US unemployment rate rose to 5% from 4.9%. Despite the Fed fund probability indicating a 60% probability of a 25bp hike we anticipate that economic data will continue to highlight decelerations, prompting the Fed to delay hikes in 2017. While volatility in FX is rising we expect that any USD rally will be unsustainable, especially against high yielding EM currencies. Polling has Donald Trump at a 20% probability of winning the US elections. As this number shifts a long basket of JPY, USD and short CAD, MXN and CNY will continue to gyrate.
Yann Quelenn, market analyst: “Busy week for the Fed: No less than seven Fed members will speak this week, including Janet Yellen on Friday. Financial markets are expecting that like last year, policymakers will hint more strongly about a December rate hike, which is now priced at around 65%. In terms of data, the week is also well loaded with some major events. September FOMC meeting minutes will be released this Wednesday but there should not be any surprise on that front and the tone should remain hawkish. On Friday, September retail sales will be widely awaited and the consensus is for a strong print, driven by the iPhone 7 release.
What remains concerning and what the Fed will be questioned on, is why has it decided to now raise rates while inflation expectations are diving further into negative territory. From our vantage point, a (likely) December rate hike will be done simply to boost the central bank's credibility. Labour data has often been a strong point in the Fed’s arguments to raise rates. Last Friday’s NFP is only hiding the fact that despite it coming in around the August release figure, 156k vs 151k, the unemployment rate increased to 5%. The Fed’s dual mandate, low unemployment and price stability, looks at stake. Currency-wise, the demand for dollar seems still strong. Only another disappointment from the Fed could send the EURUSD higher. We do not see a major move before year-end on the pair. The Fed is almost certain to raise rates.” --
Selling pressure remains steady on the GBP and economic data indicates that the British economy is slowing. In Ireland, construction growth accelerated as new orders rose at the fastest pace in six months. The Ulster Bank Construction PMI, increased to 58.7 in September from 58.4 prior read. While the rhetoric and negative GBP is not completely unfounded, we do anticipate a recovery as investors realize how uncertain the final term of Brexit really can be.
The economic calendar is extremely light today, allowing FX to shift into a range.