Talking Points:
- Dollar Squeezes Out Sixth Straight Advance Amid Financial Market Warnings
- Pound Traders Weigh BoE Rate Forecasts Against Scottish Referendum
- Euro Traders, Take Note of Investor Sentiment Surveys for Later
Dollar Squeezes Out Sixth Straight Advance Amid Financial Market Warnings
The chorus of officials issuing warning over the complacency and risks present in the financial system keeps building towards a crescendo. An appropriate start to a week laden with exceptionally important event risk – including Wednesday’s FOMC decision – both the OECD (Organization for Economic Co-operation and Development) and the BIS (Bank of International Settlements) remarked on the fundamental dislocations in the global financial system in their respective semi-annual assessments. Neither was shy nor opaque about their assessment that markets were “at odds” with the palpable risks that developed. Both would also connect the current state of contentedness in elevated asset prices and extremely low volatility levels to central banks’ accommodation. And, there is where traders’ interests should start.
Neither the OECD nor BIS wield control over specific monetary or financial policy levers; but their warnings add to a din worry among individual central banks, collective central bank standings, economists, analysts and especially market participants. It is only a matter of time before leverage, volume and participation normalize; and the combination of a rising backdrop of volume these past weeks and the upcoming FOMC rate decision offer the best circumstance for comprehensive change that we have seen in years. Given the Fed this past week officially set up a Financial Stability Committee, central bank research was released suggesting the market is underestimating the authority’s path moving forward and Chairwoman Yellen warned of froth in certain sectors; it is a strong possibility that a more concerted effort is made this go around to get the markets back on track.
As we count down the hours until the FOMC event, we will have some event risk to take in. In the upcoming session, the TICS capital flows data is as rudimentary a capital flow indicator as it gets. Yet, it is carries limited value given it is two months removed – July figures. Meanwhile, the factory price data (PPI) will give a good lead in to CPI. However, with the FOMC weigh in on policy, there is little room for its minor adjustment.
British Pound Traders Weigh BoE Rate Forecasts Against Scottish Referendum
Interest rate expectations for the Bank of England (BoE) have been a key driver for the British PpPPI, RPI. This data is critical for establishing the BoE’s ability to justify lifting rates. Then again, that hawkish pressure falls instantly flat if Scotland votes for independence on Thursday – among many other issues. Traders should watch the inflation data as it crosses the wires. However, its true impact will be felt over the medium-term so long as there isn’t a long-term distraction via a ‘Yes’ vote for the referendum.
Euro Traders, Take Note of Investor Sentiment Surveys for Later
Under normal circumstances, the Eurozone and German investor sentiment surveys from ZEW generate limited response from the shared currency and the region’s capital markets. That said, its importance should not be overlooked. While the focus has been on the implications of a loosening of monetary policy on yields and the currency – which is furthered by this week’s first Targeted-LTRO placement – a greater potential risk is what happens should the foreign capital that flooded the region were to reverse course. A drop in sovereign bond yields and disproportionate drop in EZ markets would have a reverberating impact on the currency.
Australian Dollar Gaps Lower to Start the Week After Weak Chinese Data
Though it wasn’t on the scale of the sterling’s massive opening dive last Monday, the Australian dollar led the way this week amongst the majors with a gap lower. The catalyst was a round of disappointing Chinese data. On Saturday – while markets were closed – China reported a more than 12-year low in fixed investment and the slowest pace of factory growth in over five years. The RBA minutes reminded us why this important when it noted today that China’s health is a key catalyst. Otherwise, their belief that the AUD is overvalued met little interest.
Will the BoJ and SNB Try to Keep Pace with the ECB’s Stimulus Efforts?
There are central banks whose policy is founded on their relative position to major counterparts. For the Swiss National Bank (SNB), keeping a 1.2000-floor on EUR/CHF is a direct issues with the ECB’s stimulus bearings. However, the Bank of Japan (BoJ) finds itself in a similar position. Much of its effectiveness in devaluing the Yen owes to its late move and its solo view of expanding. Now what happens with the ECB moving?
Emerging Markets Receive Direct Warnings from BIS
The swell in global stimulus over the past years has encouraged excess in the Emerging Markets and thereby positions the segment at extraordinary risk moving forward as changes like a Fed shift are realized according to the BIS. The group noted that there is particular risk amongst these economies were corporate borrowing has hit levels that match output. What happens when rates rise on that exposure…
Gold Receives Brief Breather on ‘India Demand’ Story
India’s trade deficit ballooned in August according to data Monday, but that was an encouraging – if brief – boost for gold traders. According to the data, imports of precious metal jumped 176 percent in response to the easing of curbs on shipments. One country’s appetite is unlikely to sustain gold’s advance though. And, if data and events show the Fed and BoE are tightening the reins, the metal will suffer for it.