Central Banks Renew Stranglehold On Capital Markets

View from the FX Dean: Monday September 14, 2015

This is a massive week for capital markets where volatility will be heightened as dealers wait for a number of a rate decisions and economic projections from key central banks (BoJ, SNB and Fed).

To hike or not to hike: Obviously the FOMC rate decision on Thursday is the showstopper. U.S policy makers are heading into this week’s pivotal interest rate-setting meeting with the street split over whether Ms. Yellen and company will tighten monetary policy for the first time in nearly a decade. This follows weeks of mixed signals from various Fed speakers.

Whether they move this week or later, Fed officials say they expect to move rates up gradually, but will it be gradual enough for the U.S economy and the investor?

If the Fed skips this week, it would extend a destabilizing period of uncertainty over the Fed’s intentions and create some massive challenges for Ms. Yellen, both in the credibility and communication department, hence the cautious trading tone ahead of decision and reason why the USD strength remains tied to Thursday’s announcement. It’s currently trading at its lowest level in three-weeks (DXY: 95.14).

The futures market is only price a +24% chance of a Fed hike as emerging markets, particularly China, struggle.

Even if there were to be a rate hike from the Fed, the dollar could come under pressure if U.S policymakers downgrade their views on the appropriate path for interest rates next year – investors need to follow the dot-chart closely and Ms. Yellen’s post decision news conference.

More disappointing Chinese data over the weekend adds to global growth worries. Growth in investment and factory output missed forecasts, which raises questions whether China’s growth could slow below the psychological +7% handle for the first time since the global financial crisis began. If China is slowing aggressively, will the Fed reconsider raising interest rates?

Ahead of tomorrow’s Bank of Japan (BoJ) policy decision, dealers seem to be speculating that while Governor Kuroda has the necessary support to ease monetary policy again, no easing will be announced. It seems excessive JPY weakness is also a hot political issue. Nevertheless, it’s difficult for the BoJ to preempt the Fed decision. With investors on cautious footing ahead of Thursday’s announcement is guiding JPY higher (¥120.16).

Depreciation pressures on EM are expected to grow ahead of a potential Fed liftoff on Thursday (USD/TRY hit a record high as it approached the $3.07). Investors should remain wary of the initial kneejerk reaction of a “no” rate hike.

The Euro continues to trade a tad below its two-week high (€1.1320), while the pound remains firm (£1.5444) on weekend comments from BoE MPC member Weale who reiterated his view that U.K interest rates would need to rise relatively soon.

Rest of the world beware: Sweden’s Riksbank has indicated that macro-prudential policies –capital requirements and leverage limits – to counter asset bubbles have thus far failed in Sweden due to political “inaction and turf wars.” This has led to house prices and personal debt levels soaring to record levels.

Aussie PM Abbott’s leadership is been challenged for the second time this year. Australia Communication Minister Turnbull resigned to challenge the PM citing lack of economic confidence. A party ballot will be held later today. Thus far the AUD has shrugged off the news AUD$0.7123.
Update: PM Abbott has been ousted in an internal government challenge – Malcolm Turnbull winning with 54 votes vs. 44

Campaigning for Greek election enters its final week before the next Sunday’s (Sept. 20th) vote. Recent Polls indicate that the Syriza party has a wafer thin lead, which will likely deliver a hung parliament.

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