- Risk appetite surging back as October FOMC meeting minutes indicate strong US economic fundamentals and members more united on rate path
- Although Fed remains concerned about the accomplishment of its dual mandate, the central bank is now almost obliged to increase symbolically its rate and to end the zero interest-rate policy for credibility reasons
- There is still a non-negligible risk that downward pressures on inflation due to a strong dollar will continue. We remain bearish on the EURUSD
- BOJ: despite the positive front we anticipate that economic slowdown will force the central bank to ease further in 2016
- The positive risk sentiment may further weaken the USD across G10 and EM currencies
- With the market considerably short, AUD further forced liquidations of shorts are possible
- The decrease in private consumption could trigger EURGBP buying as positioning is heavily short
- Swedish unemployment rate should remain unchanged at 7.3%, suggesting that our bearish EURSEK view is stable
Risk appetite has come surging back as the October FOMC meeting minutes indicated strong US economic fundamentals and members more united on rate path. The clarity provided that on a gradual pace of interest rate hikes boosted risk sentiment. The S&P 500 index rose 1.6%, the strongest rally in four weeks and US rates remained steady. The positive tone was carried into the Asian equity session as stocks are green across the board. The Shanghai led the gains up 2.13%. The positive risk sentiment caused the USD to weakness across G10 (commodity currencies seeing the largest gains) and EM currencies. USDJPY fell to 123.10 from 123.64 after the BoJ held policy unchanged. Bullish momentum in the AUDUSD generated a short squeeze, pushing the pair up to 0.7177. With the market considerably short AUD, further forced liquidations of shorts are possible. Swiss trade balance widened to 4.1bn from revised higher 3.25bn. Exports swelled 5.4% from 0.2% prior read, while imports increased 3.5% from 2.6%. On an annual basis, both exports and imports declined by -1.5% and -5.3%, respectively in October. USDCHF fell to 1.0148 from 1.0200 and EURCHF dropped to 1.0861 indicating strengthening of the CHF on this positive trade results.
The FOMC meeting minutes all but finalized a 25bp rate hike in December in our view. Most policy makers anticipate that the US economic environment and outlook would support a rate hike in December. The minutes indicated that the changes in the October forward guidance were "intended to convey the sense that, while no decision has been made, it may well become appropriate to initiate the normalization process at the next meeting…". There was some disagreement on the outlook for inflations among members although the group generally agreed that inflation would gradually return to 2.0%. Elsewhere, Fed’s Lacker commented on CNBC that emphasis on global risk had been overstated. Lacker stated, "We’ve been through episodes like this before in which some disruption of a certain geopolitical or military nature affects things. For a time people can get cautious and pull back a little bit. These tend to be transitory." The clarity provided by the minutes provided reprieve to the markets allowing USD to sell-off marginally.
***Yann Quelenn, Market Analyst: “Usually three weeks after each FOMC, the Fed minutes were largely awaited. It seems that Fed members have judged that US economic conditions have expanded at a decent pace in recent months. A December lift-off is clearly a possibility. However, the Fed remains concerned about the accomplishment of its dual mandate. Inflation is holding way below the 2% target and the pace of job gains slowed. In addition, we believe that the Fed is almost obliged to symbolically increase its rate and end the zero interest-rate policy for credibility reasons. Janet Yellen in particular, has to show that the situation is in control.
Yet, the Fed’s committee, which removed the word “patience” in its (already 8 months ago) March statement, ironically appear to be very calm. We believe that the next NFP figure will be decisive factor in whether or not interest rates will go up. The Fed also added that they would assess “a range of labour market indicators over the period to confirm further improvement in the job market”. At some point, being so afraid to raise interest rates by a quarter point after 3 massive quantitative easing sounds contradictory.
The Federal Reserve also remains focused on the impact of lingering low commodity prices. There is still a non-negligible risk that downward pressures on inflation due to a strong dollar will continue. We remain bearish on the EURUSD.”***
The BoJ held its policy strategy unchanged to increase the monetary base at an annual pace of ¥80tn. The central bank again sounded optimistic on its assessment for mild economic recovery, supported by housing investment and private consumption. Yet, in terms of inflation the BoJ admitted that "some indicators have recently shown relatively weak developments". Despite the positive front we anticipate that the economic slowdown will force the central bank to ease further in 2016.
In the European session, UK retail sales are expected to fall by -0.5% m/m in October. The decrease in private consumption could trigger EURGBP buying as positioning is heavily short. Sweden unemployment rate should remain unchanged at 7.3%, suggesting that our bearish EURSEK view is stable.