FOMC
A 25bp cut is all but priced in, but what is the messaging?? One thing is for sure, the Fed is not going to deliver a hawkish rate cut with the trade war debate still in the balance. And frankly, I would be shocked if there was any material shift in policy that is not already factored into the equation.
Equities
Any hope of a pre FOMC equity bounce in Asia was dashed after "An unnamed US administration official told Reuters that Washington and Beijing are continuing to work on an interim trade agreement, but it may not be completed in time for the leaders of the two countries to sign in Chile next month," Other than providing some candy for analysts no asset class has aggressively reacted to the headline, but it did give more cause for market makers to sit on their hands ahead of the FOMC.
These headlines are an annoying distraction as it provides a not too subtle reminder of how quickly things can turn on the trade war front while psychologically lingering in the back of trader’s minds.
Currencies
In currency markets, everything will be dollar focused today with US GDP, ADP private payrolls, and the Fed's rate decision all to come. And when you throw month-end flows into the equation, it could be a bit choppy even more so as primarily market makers will make any excuse, other to put through profitable sales desk order through, to keep the slate clean.
G10 FX vols are almost unchanged ahead of the FOMC, and with them sitting at extremely depressed levels, there is a risk of going into very rangebound currency trading for a few weeks (maybe even months) if the Fed fails to deliver any material policy surprise.
(local currency wrap below)
BREXIT
I think I should have gone to law school instead of business school when it comes to trading Cable these days.
After yet another defeat in the Commons on Tuesday, UK PM Johnson will try proposing a new one-line bill for the next election date to be amended to Dec. 12. That would only require a simple majority to pass rather than the two-thirds required in previous attempts under the Fixed-Term Parliament Act.
GBP remains in a holding pattern ahead of yet another potentially important parliamentary session. I think I have said this every Asia-EU shift handover for the past two weeks. But with the major no-deal Brexit tail risk out of the way and until we get into the meat of the polling debate, I have a small bias to continue buying the dip. But with month-end flows and the FOMC later in the NY session, the currency market sidelines sure does look tempting.
Oil
Volume-wise it was a typically quiet pre-FOMC commodity session in Asia, but the primary take away is that for the time being until the US oil inventories move into a significant deficit, demand fears amid rising US oil stockpiles will supersede signs that Saudi Arabia is willing to make deeper production cuts. Of course, when push comes to shove, and the proof is in the pudding, OIL prices will move higher when there's compliance commitment signed sealed and delivered.
Given the expected macro data and headline risks between now and OPEC meeting in December, some traders are hesitant to buy into the production cut narrative. Which makes sense as risk markets navigate the Fed policy statement later in the NY session and the deluge of chunky key macro data events the rest of the week.
Phase one' deal between the US and China could help turn confidence, but so far, there are few signs of green shoots on the macro landscape. However, macro data could hold the key for the next short-term catalyst for oil prices, especially if the data show signs of bottoming. Given the fall in implied risk around Brexit and Trade war and central banks making more mid-cycle adjustments (the Fed cuts tonight) and throw in and OPEC production cut for good measure, what's there not to like about buying WTI at $ 54-55 per barrel.
Gold
Gold continues to trade sideways ahead of the FOMC. There was a mild case of fast money short covering on the possible delay to sign phase 1 of the trade deal, but the primary focus for the gold market is the FOMC forward guidance and how both the US dollar and bond yields react. But one thing that is for sure the Fed is not going to deliver a hawkish rate cut with the trade war debate still in the balance. In fact, I would be extremely surprised if we broke out of the current $1475-1500 as the Feds are unlikely to deliver any material shift in policy that is not already factored into the equation.
Local Currency Wrap
Australian Dollar
Overall, Australia Q3 CPI was in line with RBA forecasts if anything it pushes back against a dovish RBA even more so after Governor Lowe last night again downplayed CPI arguing: "the Australian approach to inflation targeting together with our broad mandate is better suited to this changing world than are more rigid arrangements".
All of which suggests in the RBA's new word view that inflation targeting alone is no longer the primary catalyst for another rate cut.
Yuan
Mild short-covering in USDCNH after news overnight that more time may be needed for the phase-1 US-China trade deal. But it will take more than a delay to push USDCNH above 7.10, but there could be more short covering later in the day as Europe gets a look at the news flows. Not a significant hic-up for risk but still a subtle reminder just how quickly the trade war narrative can swing
Thai Baht
The Thai Baht had a very slight bounce, but trader appears to be following XAU-THB correlation which could be back in play. Expect USDTHB to remain heavy with inflows and equities keeping risk bid.