Central Banks Are Coming For FX

Monday September 19: Five things the markets are talking about

Central banks have certainly woken up the stock and bond markets from their summer slumber, but not yet the FX markets. This week’s events should go along way to rectify that imbalance.

With the Federal Reserve and Bank of Japan rate decisions set to dominate this week, expect traders to continue to fine-tune their positions ahead of Wednesday’s meetings.

First up, the BoJ will issue a report card on its multi-year deflation-fighting campaign. The focus will be on whether the Governor Kuroda will have the appetite to cut its main interest rate further into negative territory or tweak its easing programme in other ways.

Later, the Fed concludes its own two-day meeting with a vote on whether to raise short-term interest rates. In recent weeks, voting members have appeared split, but investors see an imminent increase as unlikely.

Fed Chair Janet Yellen will also hold her quarterly press conference, and policy makers will release updated projections for U.S inflation, unemployment, growth and rates. Will the Fed Chief provide any hints at what might happen at its meeting in December?

In late trading Wednesday, the Reserve Bank of New Zealand (RBNZ) will deliver its own rate decision.

1. Global equities get a boost from commodities

A rise in commodity prices has lifted stocks overnight as energy companies rebound from last weeks bruising encounter.

Futures point to a +0.5% opening gain for the S&P 500, reversing Friday’s losses, while the Stoxx Europe 600 is up +1% in early morning trade, led by last week’s worst-performing sectors – oil and gas companies and banks.

Asia stocks also saw a lift higher, with markets in Shanghai and Hong Kong adding +0.8% and +1%, respectively. Aussie shares were little changed after technical glitches delayed the opening of the market, while bourses in Japan were closed for a holiday. China returned from its two-days of holidays to stage a rally led by property developers and financials.

Indices: Stoxx50 +1.0% at 2,964, FTSE +1.4% at 6,806, DAX +0.7% at 10,347, CAC-40 +1.2% at 4,384, IBEX-35 +0.9% at 8,710, FTSE MIB +1.6% at 16,443, SMI +0.7% at 8,188, S&P 500 Futures +0.5%

2. Crude rallies on geopolitical concerns, gold in the black

Oil prices have rallied almost +2% overnight, after Venezuela said OPEC and non-OPEC producers were close to reaching an output deal and as clashes in Libya raised concerns that efforts to restart crude exports would be hampered.

Despite next week’s OPEC meeting in Algeria (Sept 27) being an “informal” meeting, crude prices are expected to be rather jumpy ahead of the conferences, driven mostly by “hearsay.”

Brent crude futures are at +$46.54 per barrel, up +77c, or +1.7% from their Friday’s settlement. U.S. crude is up +78c, or +1.8% at +$43.81 a barrel.

Both Brent and WTI prices were dragged to multi-week low on Friday amid worries returning supplies from Libya would add to the global supply glut. Nevertheless, overall global supply concerns should cap crude’s rally.

Gold prices are rallying on the back of a weaker dollar, as investors wait for the Fed’s next policy moves this week.

Spot gold has edged up +0.6% to $1,317.73 a troy ounce ahead of the U.S open with other precious metals also trading higher.

Silver is trading up +1.9% at $19.15 a troy ounce, platinum is up +1.3% at $1,029.50, and palladium is up +0.8% at $678.50 a troy ounce.

3. Yields curves continue to steepen

The month of September has seen some big moves in bonds, as yield curves steepen on fears that the ECB and BoJ are becoming more hesitant to boost their stimulus plans and the Fed will begin to eventually tighten.

The number of developed market sovereign bonds trading in negative-yielding territory (NIRP) has dropped to +34% from +40% at the end of June, following the recent selloff.

This weeks central banks meetings will go a long way to shape global yield curves. In the U.S, most of the demand for their debt product has come from abroad – Japanese and eurozone investors alone have absorbed the equivalent of nearly all U.S. Treasury net supply in Q1 of 2016.

Overnight, U.S long bond yields declined slightly, with the 10-year Treasury note last at +1.691% from +1.701% last week. German bunds have also pulled back slightly to yield minus -0.008%.

4. Greenback under central bank pressure

The dollar is backtracking ahead of the U.S open, in contract to last weeks gain on upbeat economic data.

The cause? Investors are tempering their hopes for an interest rate hike from the Fed on Wednesday. Fed fund futures are pricing in a +20% probability for a rate hike after Friday’s U.S CPI data. The majority are not prepared for a Fed surprise.

The accompanying statement will be important as it is expected to hint at the Fed’s intentions regarding the future of its monetary policy. If not Wednesday then it has to be a December hike to save Fed ‘credibility’ once again.

Among USD majors, the greenback was under pressure across the board, falling to ¥101.82, compared with ¥102.28 late Friday. Sterling is trading up at
£1.3053, compared with £1.3004. However, less active is the EUR outright, currently trading at €1.1164, largely unchanged.

5. Hungarian Forint, Bonds rally on a surprise S&P upgrade

The HUF (€307.61) and government bonds have strengthened considerably as a result of S&P’s surprise upgrade of the country’s sovereign debt back to investment grade after markets closed on Friday.

With Hungary now ranked above “junk” at two rating firms (Fitch earlier this year) demand for Hungarian assets is likely to rise over the medium term amongst foreign investors.

Similar to other high yielding currencies (AUD, NZD), Hungarian bonds provide significantly higher yields compared to developed market bonds – their 10-year maturity is trading at +2.83%. Both German bunds and Japanese JGB’s are trading in negative territory.

Investors can expect the Hungarian Central Bank (MNB) to provide verbal intervention should a fresh wave of capital inflow fuel extraordinary HUF gains.

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