Some FX Half-Time Results So Far This Week

• Despite FX volume and volatility having both picked up in the first few days of September both geopolitical and event risk have convinced many investors to remain on the sidelines. As highlighted two weeks ago these next couple of weeks will set the tone for whole of Q4.

• The markets should see more of the “Cry Wolf” Dollar trade: For example, when Russia cried wolf and detected the launch of two missiles from the Mediterranean yesterday – later announced as a joint Israeli/US exercise.

• What Investors did under “Cry Wolf”: Traders jumped into perceived safe-haven of the JPY and CHF on suspect headlines. Other risk sensitive currencies like the Aussie and Cable will lose. Market’s are expecting this to be the standard strategy of Event Risk. Until there is more clarity from Obama and Congress.

• The AUD found support after the RBA kept their benchmark interest rate unchanged yesterday at +2.5%. Governor Steven’s communiqué, the forward guidance no longer signals a clear dovish bias (and the phrase “inflation outlook could provide some scope to ease policy further” was removed.)

• BoE’s Carney has his own problems: Stellar UK data makes his job more difficult. The Pound has remained relatively strong after UK Construction and Service PMI rises at the faster pace in six-years – this is will make Carney’s forward guidance of low rates very difficult.

• US Treasury yields are playing catch up this week after the US labor holiday. The benchmark 10-year has backed up to +2.86% and more in line with this weeks weakness in the core European bond market. Global bonds have pushed lower after stronger than expected Global PMI data, including China last weekend – FI traders expect this trend to continue depending on what may happen in the Middle-East and Syria. (Targeting +3% short term)

• As to be expected, both crude and gold spiked on the Russian missile report. The market price action indicates the vulnerability of current commodity market positioning. Persistent risk aversion will eventually help bullion to break out higher from its recent price range.

• Global equities remain at the mercy of the Syrian outcome, despite the stronger than expected global Purchasing Managers Index data.

• Organization of Economic Co-operation and Development (OECD) warns that global growth could be weakened further on emerging market turmoil. Analysts are beginning to slash 2013/14 Indian growth rates. The OECD is warning that the already subdued growth rates could be weakened further if the strong outflow of capital from emerging economies persists. Developed countries need to remain accommodating. Bank of India has been in on a number of occasions to defend its currency by selling dollars.

• Pressure on Japan: They are expected to tell G20 that they will hike sales tax as planned-tiered strategy starting in Q2 2014. The current Yen weakness (Finance Minister Aso) is a side effect of Japan’s efforts to beat deflation.

What is to come?

SYRIA: Despite Obama/Kerry’s less than inspiring comments last week, it seems they have managed to garner Congressional support for military action against the Assad regime and its only a matter of time that the senate and Congress will agree on what “type” of strikes.
• Leading Democratic and Republican senators have reached a deal on a motion authorizing an attack on Syria, adding momentum to US President Barack Obama’s risky push for congressional approval for military action.
• The motion, which could be voted on as early as “today,” specifically rules out deployment of US forces in Syria and only allows Obama to repeat strikes once he has certified that chemical weapons have been reused.

Central Bank Announcements: Tomorrow ECB and BoE: “Rates lower for longer”

Last week’s Euro soft CPI will keep the “doves” pushing for a continued easy, possibly easier monetary policy stance, whilst the Euro PMI’s will harden the resolve of the “hawks”.

Draghi faces a number of challenges: Could the upcoming German election argue for caution this month? Sept 22

This Friday’s US Payrolls: Consensus +180k. Payrolls probably rose solidly in August. Jobless claims fell slightly faster in August than they had been falling in previous months, but the employment components of surveys of August activity have seemed consistent with the recent pace of employment growth. Is the trend in payrolls is certainly strong enough to continue to bring down the unemployment rate (+7.4%)? This will help the Fed in its decision to “Taper or not to Taper.”

The Aussie Election on takes place on September 7th. Liberal Coalition under Tony Abbott is favourite to win.

US Congress: Congress returns to DC on the 9th and their first priority will be to deal with the budget and debt ceiling. The market seems to be expecting the issues to be resolved without exacting too much economic pain, however, the process of reaching an agreement may cause some “volatility” (government spending authority expires Sept 30th – and without an extension, the Fed government would partially shut down until funding is restored). The Federal debt limit will need to be raised probably sometime between mid-Oct and early-Nov.

Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX

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