Volatility is the forex investor’s greatest ally. In the month of September, there has been no let up from this key variable that had been missing during the G8 Central Bank “lower for longer” interest rate stretch over the past two-years. Volatility provides investors opportunity, something that has been in abundance for a number of weeks now, ever since investors started to price in the potential of interest rate differentials actually beginning to appear ‘sooner’ rather than ‘later.’
Diverging monetary policies has been the driving force propelling both GBP and the USD higher as the Fed and BoE shift expectations towards a “normalization” of monetary policy, and the EUR and JPY lower, as the ECB and BoJ are seen maintaining “negative” and “zero” interest rate policy while further expanding their balance sheets.
Investors have NFP and QE to contend with
This is another heavy-laden data week, where new record EUR (€1.2679) and JPY (¥109.57) lows or even dollar highs are expected. Europe will once kickstart the week’s trading activity with German preliminary inflation numbers. It tends to be an all-day event on this Monday, because the ‘actual’ is comprised of data from six-German states, which report their consumer-price indexes throughout the day. Already, the five German states that have released the data for September suggest very little in the way of surprises on the pan-German CPI release later today. The preliminaries would suggest that the market would see the expected +0.8% y/y, print for German September CPI, unchanged from its August level.
Also this week, both China and the U.K. will deliver manufacturing purchasing managers’ indexes by midweek, just after the market gets to gauge consumer confidence in the U.S. The ECB’s monetary policy meeting will dominate activity on Thursday. By now, the rate decision is often priced in to the market, so expect it to be overshadowed by the Draghi’s post-meeting press conference 45-minutes later. The market will be listening intently for any new updates to potential QE being implemented.
Business and consumers across the 18-countries that share the single unit have been more downbeat about their prospects in September than any time since the end of last year. This morning’s Economic Sentiment Indicator fell to 99.9 in September from 100.6 in August. Individuals are obviously disappointed with the pace of the eurozone’s economic recovery and the conflict in Ukraine. A further decline in this month’s confidence would suggest that the recent change in stimulus measures by the ECB is failing to convince both euro households and businesses that the economic outlook will improve. With neither group unlikely to raise spending in the foreseeable future, would suggest that euro economic expansion is not going to occur any time soon.
Due to the Eurozone’s Q2 stagnation, the ECB has needed to be more proactive in announcing a fresh package of stimulus measure in early September (cutting key interest rates and suggesting two-bond buying programs). For Draghi and company, it’s too early to gauge any the measures for growth and inflation, nevertheless, the market will be listening intently to his press conference looking for further reasons to add to the markets “short” EUR positions.
NZD plummets on intervention concerns
Down Under, New Zealand’s monthly ANZ Business Outlook survey will be out later this evening. It’s a leading indicator of that country’s economic health. It’s worthwhile noting that the Kiwis’ business confidence numbers have been on a downward trend over the last six-months. Business sentiment is usually an early signal of future economic activity such as spending, hiring, and investment. Kiwi traders certainly got the early jump on the FX market. In overnight trading the NZD/USD has been in relative freefall, down as much as -150 pips and approaching the psychological NZD$0.77 handle. Governor Wheeler’s RBNZ posted its monthly operation metrics for August, revealing net sales (intervention) to the tune of NZ$521M – the biggest net sale in seven-years. Wheeler and company moved to protect the country’s exporters from sharply falling commodity prices. Many analysts expect further Kiwi weakness – predominately from the highly concentrated long “carry” positions. Nevertheless, they remain cautious about the future pace of decline. Despite implied volatility having spiked of late, the pace looks unsustainable – this may give the market better levels to offload ‘bad’ positions or the ability to improve “short” NZD value.
Not being left behind is the AUD ($0.8724), very much apart of the interest rate sensitive and commodity ‘trio’ (CAD, NZD and AUD). The AUD/USD continues to be crushed this early morning, falling to a new eight-month low as it too has been caught in the Kiwi “downdraught.” Due to it’s proximity and because of it being a commodity-based currency, what hurts the Kiwi of late, hurts the Aussie and visa-versa. Despite the already impressive weakness being portrayed by the AUD, investors should expect Governor Stevens at the RBA to continue to suggest that his currency is overvalued. Most of this month’s selling squeeze has come from the “long” carry positions finally trying to exit one of the most crowded trades of this year. Tomorrow, investors get a peek at the Aussie’s monthly retails sales, while on Wednesday, it’s building approvals and trade numbers.
Asia remains weak after a flight to safety
Overnight protests and violent clashes with police by the Hong Kong Occupy Central movement demanding free elections is the main theme in pre-holiday Asian trading. The Hang Seng traded down by about -2.5% at its worst levels, but has since come off the lows on news that protester ranks have thinned and talks are taking place. Because Beijing opposes all kinds of illegal behavior in Hong Kong that undermines social stability, the market will of course remain nervous, at least until investors understands where Chinese authorities stand on the issue.
North America to close out the week
The granddaddy of economic releases – the U.S. nonfarm payrolls (NFP) report – will close out this week. The NFP’s importance usually makes for a hefty market impact. Also, Canada will produce its gross domestic product numbers in the first half of the week, while Canadian trade balance data will follow the U.S.’s own trade numbers release on Friday.