- Currencies in consolidation mode since late yesterday
- AUD bounced overnight after stronger-than-expected China PMI
- Watch EURJPY and EURUSD if September preliminary PMI’s surprise negatively
- China Sep. Preliminary HSBC Manufacturing PMI out at 50.5 vs. 50.0 expected and 50.2 in Aug.
- France Sep. Preliminary Markit Services/Manufacturing PMI (0700)
- Germany Sep. Preliminary Markit Services/Manufacturing PMI (0730)
- Eurozone Sep. Preliminary Markit Services/Manufacturing PMI (0800)
- UK Aug. BBA Loans for House Purchase (0830)
- Canada Jul. Retail Sales (1230)
- US Sep. Preliminary US Manufacturing PMI (1345)
- US Sep. Richmond Fed Manufacturing PMI (1400)
- US Fed’s Kocherlakota to Speak (1800)
- New Zealand Aug. Trade Balance (2245)
- US Fed’s George to Speak (0115)
- Japan Sep. Preliminary Manufacturing PMI (0135)
Currencies have been largely in consolidation mode since late yesterday, as the USD bull took a breather (outside of the sharply rallying USDCAD) in most major pairs.
There are no major technical developments on this so far, though USDJPY local support at 108.60 has come under pressure again and it feels like the market wants to test the bulls’ mettle in this cross here. A further drop in risk sentiment on Wall Street yesterday after the recent record highs is adding to the downside risk in the nearest term.
The vice chair of the Federal Reserve Open Market Committee, William Dudley, said: “People shouldn't overweight the value of those dots [the projections by FOMC members on where they anticipated Fed Funds will be over the next few years], especially as you get out further in terms of the time horizon… I have a dot for 2015, 2016, and 2017…but if I told you what my confidence interval around that dot was, you would probably not put a lot of weight on where that dot is precisely located. My interpretation: we have zero visibility on what will happen, i.e., why are you even listening to our forward guidance?”
This enhances the idea (my conviction, in fact) that the Fed is flying entirely blind and has no idea what it will be doing at any point in the future, essentially promising the market that it will conduct monetary policy in the rear-view mirror based on incoming economic data and can no longer offer effective forward guidance.
As someone tweeted the other day, the Fed's chair, Janet Yellen, spent considerable effort at a recent press conference underlining two way risks. We’re all flying blind, and the market projections for the distant future are meaningless. This means that volatility should remain relatively high and that each major data release may garner large market reaction in the event of both positive and negative surprises.
Chart: USDJPY
The 108.60 level has developed as a local support area in USDJPY after the pair pushed well north of 109.00 recently. Adding to consolidation risk is the sharp two-day dip in risk appetite in major bourses, though to get a further dose of consolidation lower here, we’ll need the pressure on risk appetite to remain high, and for perhaps a further rally in long US treasuries as well after yesterday’s move.
But moves may stay relatively modest – perhaps toward 107.50 in the event consolidation sets in further – until the next round of US data starting mid-next week. 
AUD bounced overnight after the HSBC China flash manufacturing PMI for September came in stronger than expected at 50.5 – and thus a nudge higher than the 50.2 reading for August. But Australia’s interest rates at the front of the curve actually dropped a few basis points, so there isn’t much fundamental support for the rally outside of the sentiment boost from the China data.
Major Australian bank shares also rallied sharply, a day after I penned an article discussing their recent weakness and the systemic risk to Australia and its financial system in the event the housing bubble begins to unwind.
The Fed is flying blind – market forecasts are meaningless, and data releases will cause volatility in the event of both positive and negative surprises. Photo: Matt Cardy Thinkstock.
Today
Today is about looking for direction in risk appetite and how currencies are responding – especially JPY, as noted above. Note as well that EURJPY has pushed below its 200-day moving average of this writing, though to be fair, better local support comes in between 138.00 and 139.00.
But keep an eye on this pair, in addition to EURUSD, in the event the September preliminary PMI’s surprise negatively. The trajectory for these PMI’s is inconsistent, with Spain clearly in improvement, France clearly remaining in the doldrums and Germany clearly worsening on the manufacturing front (though not yet having posted a reading below 50), while the Service PMI has been pulling higher.
Also note that the preliminary Markit manufacturing survey for the US will be released. The market hasn't been paying attention to these, but they are high quality surveys that generally track the ISM manufacturing survey, which won’t be released until next Wednesday.
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