Central Banks “Pretend and Extend” Intact

October continues its positive trend: Friday’s disappointing non-farm payroll (NFP) report has the market repricing the Fed’s first-rate liftoff in a decade (October +5%, December +28% and dropping fast, March 2016 +50%). Yesterday’s disappointing weakness in the U.S services ISM continues to translate into risk-on flows into the U.S. as “lower for longer” rate policies dominate. This morning’s U.S trade data does not make Ms. Yellen job any easier.

Trade Gap Cracks Appear: Stateside, the U.S trade deficit gap has widened (+16% to -$48.3b in July) as exports hit a four-year low, on the back of weak commodity prices, a stronger USD and soft overseas demand. Market should be expecting net exports to continue to be a drag on Q3 GDP. In Canada, their own supposed turnaround has taken a untimely hit; again side blinded from low energy prices. August trade numbers deteriorated more than expected (-3.6% to –C$2.53b) with the bulk of the decline in the energy sector, as sales fell -15%. Certainly not helping the loonies cause (C$1.3120) is that non-energy exports also fell -1.5%.

Not unexpected from down-under: The Aussie has found support (AUD$0.7112) after another “neutral” Reserve Bank of Australia (RBA) policy begs the question for further easing down the road. The AUD has been one of the big losers from a slowdown in China over the past year and it seems that traders are happy to see value with the currency trading around its six-year lows. Its partner in regional crime, the Kiwi, does not have the same market support (NZD$0.6493). With weak inflation, dealers are pricing in another -25bps to +2.5% by year-end. A rate cut this month is a toss up, the smart money is looking at December.

“Pretend and extend”: The safe-haven JPY is notably lower (¥120.50). The focus is very much on the Bank of Japan (BoJ) ahead of this evening’s policy decision. Not this time, but the market is on high alert looking for signs from Governor Kuroda to potentially pave the way to announce further easing to accompany their updated projections for growth and inflation at the “next” October 30th decision. The fixed income market is currently pricing in a +40% chance of further stimulus month-end vs. +5% a month ago.

Pound on a slippery slope: A much weaker-than-expected reading of the U.K services sector purchasing managers’ index (PMI) yesterday has the market cutting their forecasts for Q3 growth. This morning, U.K house prices fell last month further supporting weaker consumer demand. Weaker data is again pushed back market expectations of monetary tightening by the Bank of England (BoE). Currently, FI dealers are looking at the end of 2016’s curve. It was just five-months ago the market was pricing in the end of 2015 (€0.7400).

Investors find value in EM stocks: EM equities have extended its longest rally in a month, but a couple of their respective currencies remain under pressure as commodity prices trade softly from global growth concerns (IMF has revised World GDP down to +3.1% from +3.3%). RUB down -0.7%, followed closely by TRY, ZAR and BRL. Exceptions to the rule are some high yielding Asian currency pairs. Indonesia’s rupiah (IDR) is set for its best day in six-years as investors seek higher returns on expectations that the Fed may hold off raising interest rates.

China Fourth: In August, the Chinese yuan became the fourth most-used world payment currency, overtaking the Japanese Yen. The yuan has surpassed seven currencies in the past three-years and currently lies just behind the USD, EUR and GBP.

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