The US dollar is inextricably linked to the Fed, or is it? The greenback was the laggard on Thursday after the FOMC Minutes, but we look at how ignoring the whims of the Fed paints a compelling underlying picture of the dollar. Australian home loans highlight a quiet end to Asia-Pacific week. Ashraf's Premium Insights service went short on a currency pair, with a 73% winning record since 2011. The trade has been filled and is now in progress.
What if the Fed isn't the major driver of the US dollar? Every report we read is hyper-analytical of every word from anyone at the Fed. The narrative of September in markets was will-they-hike-or-won't-they. The thing is, it's impossible to explain market moves since August with such a focus on the Fed.
A better narrative is this: 1) The US economy isn't as robust as believed or hoped. It's a 2% economy not a 3% economy and recent data underscores it with strong dollar headwinds still in the pipeline. 2) Emerging market growth has stumbled, especially in Latin America. 3) China's slowdown is evident but not its extent as it's such an opaque economy to the extent of triggering more fear/risk aversion than would normally have been justified.
The US dollar was already on its way to topping before the events of August/September. Ashraf had mentioned it two months ago on Twitter and on this website (see tweet above) when it was popular to predict a higher USD and a Fed rate hike. Manufacturing and capex numbers were softening but when China revalued it created fear elsewhere and a flight into the safety of US dollars. That was directly competing with the softer US outlook/Fed and the push-and-pull sparked volatility, uncertainty and even more risk aversion. A second wave hit around quarter end on window dressing.
Now the smoke is clearing on the emerging market confusion. Growth has slowed but it's not as bad as feared and China has plenty of ammunition to stimulate its economy. That leaves the theme of less-robust US growth and the safe haven flows into the US dollar will slowly reverse and that will be what leads to the kind of steady US dollar selling we saw in New York trading today.
The Australian dollar is especially well-positioned to benefit. We wrote about how October is the best month seasonally for AUD and it's climbed for seven consecutive days. Impressively, today it erased an earlier loss to close near the highs. In fact, today's Premium trade is related to a commodity currency.
The focus will remain on AUD and sharpen at 0030 GMT with the release of August home loan data. The consensus is for a 4.7% m/m rise.
|Home Loans (AUG)|
|5.0%||0.3%||Oct 09 1:00|
In the near-term the focus is on China as it returns from an extended holiday. The kiwi was the top performer on Wednesday while the Swiss franc lagged. Japan also releases top-tier data in the hours ahead. One of the two existing Premium GBP trades was adjusted ahead of tomorrow's BoE decision.
China has been on holiday for five days and that covers the latest leg of global equity market strength. Foreign-listed Chinese ETFs are up nearly 10% since the Shanghai Composite closed on September 30.
The spike should be priced in but the headlines could spill over and spark a bit of optimism elsewhere. The market has been digesting a steady stream of good news from the stock market as the S&P 500 climbed for the sixth time in seven days.
The Australian dollar also climbed to make it six straight days of gains. The Canadian dollar had joined it earlier in the session but reversed lower alongside oil after US weekly oil inventories were unexpectedly large.
Again, we reiterate USDJPY's inability to rally despite the latest bump in risk sentiment, which highlights the fact that a dovish Fed is an integral component of the rally. However, December Fed fund futures have been ticking higher and are at 40% -- the best level since non-farm payrolls.
The Bank of Japan is the flipside of the USD/JPY equation and hopes for more BOJ faded after yesterday's meeting. Kuroda remained confident in the inflation forecast and didn't make a case for easing when officials meet again on Oct 30. But market participants have a good memory and recall that last year's BOJ QE was a surprise.
Kuroda, however, may have tried to overtly dampen speculation as he highlighted differences between last year's economy and the current outlook. At the time, measures of inflation were falling and this year they're rising, he noted.
Economic data will continue to be scrutinized. At 2350 GMT the August machine orders report is due and expected up 2.3% m/m. At the same time current account data is due.
|Current Account n.s.a. (AUG)|
|¥1,221.0B||¥1,808.6B||Oct 07 23:50|
Is the best sign of the abatement in fears about the global economy seen via the recent non-stop rally in commodity currencies? Or, is it a manifestation of USD weakness resulting from a substitution of higher yielding currencies at a time when the much talked-about Fed hike is pushed back further in the unknown horizon? It extended Tuesday as the Australian dollar led the way while the US dollar lagged. The BOJ meeting due up next , with the possibility that China releases itsr latest FX resereves data even as markets are shut for the final day of National Day holidays. Ashraf issued a 33-minute video for Premium subscribers highlighting the similarities and differences in the current equities bounce with the developments of 2011, 2008 and 2000.
The Australian, and Canadian dollars climbed for the fifth consecutive days. AUD rallied the most in four weeks as a result of the RBA, which held a neutral stance rather than shifting to a more dovish bias. The Canadian dollar was lifted by oil, which gained 5% on better demand forecasts and tighter inventory data. WTI crude is now testing the Aug 30 high of $49.44 in what's a key level to watch for CAD traders.
We are cautious that the five-day commodity currency rally has coincided with a five-day Chinese holiday. In addition, note that USD/CAD has only rallied in six consecutive days twice since 2009 and never for seven straight days. The most-recent six day rally was in July 2013. The pair is nearing the post-FOMC spike low of 1.3010.
In the hours ahead, commodity currencies will vacate the spotlight to the yen as the BOJ meets. The decision has no fixed time but is usually in the 0230 GMT-0330 GMT range.
The bigger BOJ meeting comes on Oct 30 and that's a date that some analysts have signalled as the start of yet-another round of QE because it also includes updated economic forecasts. Abe recently talked about launching Abenomics 2.0 and yen weakness has been a key part of his platform but other signals have suggested the BOJ is very reluctant to easy further.