Late yesterday, it emerged via a story from the Nikkei that Japan’s huge Government Pension Investment Fund is drawing up plans to raise its domestic stocks allocation to 25% versus previous estimates of a 17% weighting earlier this year.
This led to an enormous rally in Japanese stocks and helped to weaken the yen, partially due to the general risk-on since late Friday, but also likely due to the idea that foreign investors looking to take advantage of the GPIF’s asset reallocation would likely prefer to hedge their currency exposure.
USDJPY
USDJPY bounced further, fully recovering the lost terrain from last Wednesday’s mini-meltdown. That 105.50 area (plus slippage) is critical for continuing to focus on further rally potential. The Ichimoku cloud support levels will be moving rapidly higher later this week (and thus more in line with other key supports). Further to the upside, the 108.20 area looks like the next resistance in Fibonacci retracement terms. Tactical support comes in above 106.00 now.
Source: Saxo Bank Over the weekend, noted Federal Reserve dove Eric Rosengren (non-voting until 2016) stated that the Fed should look through recent volatility and would likely taper the last $15 billion in monthly Fed asset purchases to zero at this month’s (next Wednesday’s) Federal Open Market Committee meeting. He also noted, however, that “if we get a lot of information in the next week and a half that indicates there’s a much more severe problem, I wouldn’t rule [extending QE3] out”.
In terms of managing QE, the Fed appears willing to be led by market data. Photo: Robert Dodge iStock
Looking at the economic calendar, I wonder what on earth the Fed could see in the next seven trading days of economic data releases that could make it change its mind on such a momentous decision. Forward guidance is dead and buried, ladies and gentlemen, and at least one of the major investment banks is promoting the view that the Fed will only taper a portion of its remaining asset purchases at the FOMC meeting next week.
Looking ahead
It’s getting close to pivot time for the US dollar, and while it's hard to believe that we are going to draw the suspense out until next Wednesday’s FOMC meeting, that may indeed prove the case.
A couple of general scenarios on that account: In the first possibility, we stay sideways until next Wednesday in most USD pairs and the Fed proves more dovish than expected (but tapers to zero), leading the USD to suffer one more bout of weakness before quickly recovering.
In the second scenario, the USD recovers a bit here toward recent highs and then blasts stronger as the FOMC meeting proves no hindrance (i.e., the market downshift in Fed policy expectations has already priced in a significantly more dovish Fed).
I think it would take a dovish development of watershed proportions (like a “fail to taper”, perhaps) to send the USD weaker. Even then, the weakness might not last for long as the US remains better positioned, structurally, than any other major economy. I prefer the USD stronger sooner rather than later, though the path could be more than tricky.
Economic calendar highlights this week
Tonight: Major Chinese data, including Q3 GDP and September Industrial Production and Retail Sales.
Wednesday: the Q3 CPI data for Australia, Band of England Meeting minutes, US September CPI, and Bank of Canada policy meeting
Thursday: New Zealand Q3 CPI, China HSBC flash October Manufacturing PMI, Eurozone flash (for France, Germany and the Eurozone as a whole) October Markit Manufacturing PMI, Sweden Unemployment Rate, Norway Norges Bank meeting, and UK September Retail Sales
Friday: UK Q3 GDP estimate
The Norges Bank meeting should be very interesting after the implosion in the oil price and NOK since the prior meeting, which saw a very complacent outlook. It will be embarrassing for the Norges Bank to adjust its outlook so quickly after already surprising the market on multiple occasions this year, but they will have to.
Other than that, raw animal spirits are critical here after last week’s bounce from a near-panic episode. Looking at technical levels on our broad risk barometers like the US S&P 500 index, note that the 200-day moving average around 1900 is now close after being broken last week. Also, Apple “computer” (a.k.a. "the iPhone company") — far and away the world’s largest company by market capitalisation — will be reporting after market close today.
Economic Data Highlights
- New Zealand September Performance of Services Index out at 58.0 vs. 57.7 in August.
- New Zealand October ANZ Consumer Confidence out at 123.4 vs. 127.7 in September.
Upcoming Economic Calendar Highlights (all times GMT)
- Australia RBA Meeting Minutes (0030)
- China September Retail Sales (0200)
- China September Industrial Production (0200)
- China Q3 GDP (0200)