Forex: Risk Aversion Continues To Dominate

The forex-trading theme remains the same – the USD under pressure with risk aversion trading strategies in vogue – as FI dealers scale back their Fed rate hike expectations. However, intraday fundamental data points continue to be important as investors seek more concrete guidance. The market will pick apart this morning U.S retail sales number for Fed clues (+0.2% e).

The EUR (one of the safer haven currencies of choice) holds above the €1.1400 handle in a tight trading range, supported mostly by the markets diminished expectation of further stimulus measures by the ECB, while USD/JPY trades below the ¥120.00 handle after Japanese policy makers downplay market hopes for further stimulus from the BoJ as early as the end of the month. With global equities under pressure from soft Chinese data will always favor owning yen (¥119.48).

Singapore’s MAS seems relaxed after “token” move: Singapore’s central bank’s bi-annual policy statement has kept the SGD currency (SG$1.3863) on its appreciation path with an unchanged band-width, but reduced the “slope” of appreciation for the second time this year. The MAS added that core-inflation would remain subdued in 2015, around -0.5% vs. prior forecast of -0.5% to +0.5%, but adjusted its forecast. Policy makers expect it to rise to about +0.5-1.5% in 2016. Not a surprise, but a prerequisite for most CB, the MAS also remarked that the global outlook has been “softer” and warned the “headwinds may persist.” The SGD naturally has strengthened now that Singapore has avoided a technical recession with a positive Q3 GDP (+0.1% q/q).

Pound not pounded anymore: Yesterday, cable bore the brunt of the markets pressure (intraday low £1.5200) after annual inflation again turned negative for the second time this year. Any sign of deflationary pressure would keep the BoE on hold for longer. GBP (£1.5390) has aggressively rebounded from yesterday’s selloff after this morning’s jobless claims (+4.3k) and wage data (+3.0%) missed expectations. With U.K wage growth remaining well ahead of the U.S, coupled with the commodity impact, is expected to eventually bring inflationary pressures. This will require FI to reprice the UK curve. Another decline in unemployment means a tighter labor market, which creates conditions for ongoing wage growth and hence a proactive BoE.

China remains consistent with softer data: In the overnight session, China’s CPI missed expectations – the rate of inflation has slowed after three-straight months of increases (1.6% vs. 1.8% e). It’s worth noting that most of the deceleration was behind the food component, which slowed to +2.7% vs. +3.7% prior – non-food inflation was little changed around +1%. China Stats bureau said that the lower CPI was mainly due to high base effect in the prior year. Nevertheless, do not be surprised if the market uses the data to speculate potential further easing from the PBoC.

Potential clue for easing down-under: Getting a lot of airtime overnight was Westpac deciding to pass on some of the higher capital requirements to consumers. They have raised their variable mortgage rate by +20bps, along with announcing a capital raise. Will the Reserve Bank of Australia (RBA) help offset the effect on borrowers by easing on the next go around? The FI market is beginning to think so and is pricing accordingly. The Aussies antipodean counterpart prefers to use rhetoric rather than action to apply currency pressure. RBNZ Governor Wheeler briefly sent the kiwi lower (N$0.6721) as he noted additional easing seems likely and China outlook posed a “key” concern.

Commodity currencies cutting edge: The most interesting of the intraday moves are not necessarily occurring amongst the majors, but from the commodity and rate sensitive currencies (AUD, CAD, NZD) and some of the EM currency pairs that have been under severe pressure since China’s currency revaluation in mid-August. The loonie (C$1.3002) has seen a three-cent swing since Friday, a similar move for both the Aussie and Kiwi. The CAD move higher has more to do with a large market order being executed stateside, while the antipodean pairs have been guilty by their association to China and their respective CB policies.

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