It’s been a while since we’ve had a week with as much event risk as this one upcoming. Wednesday’s Federal Reserve meeting and Thursday’s referendum on Scottish independence and the first round of the ECB’s TLTRO are the kind of events that bring a decent lump of volatility with them and give some currency pairs a knock into newer trading ranges.
Wednesday’s FOMC meeting will not see any policy change. Another $10bn will be cleaved from the amount of asset purchases they are making to bring the total to a relatively miserly amount of $15bn a month. Alongside this cut will come new and updated inflation and unemployment projections, a policy statement and a speech by Janet Yellen.
The tapering of $10bn is old news by now but the projections – and maybe more importantly the accompanying statement and speech – have the real possibility of changing some of the landscape around USD as we come towards Q4. The market, as it can be found to be frequently, is being rather myopic in its quest for volatility and focusing on one phrase; “considerable time”.
Should the Fed feel the need to amend its policy statement by amending the phrase “rates will stay low for a considerable time”, the market will take this as a bullish sign that the Federal Reserve is starting to get into the new mindset that will see it raise interest rates. Should that language change come out in concert with a move higher in inflation expectations or a cut to the unemployment estimate, USD will be off to the races.
This expectation of a language change has been largely the single driver of USD in the past few weeks as the data really hasn’t been there to back it up. The question we must ask ourselves, however, is why now? We know that the US economy is growing strongly and that inflation expectations are set to lift through the coming twelve months but I do not believe there is much to be gained from changing the language just yet. We had a poor payrolls report at the beginning of the month; the biggest miss in seven months. We feel there is no real disadvantage from combining the end of tapering that will occur in October.
The obvious way to play this and the value bet in our eyes is that the dollar weakens on Wednesday night as Yellen disappoints the bulls.
Wednesday leads us to Thursday and 24hrs of political jiggery-pokery that could set a bomb under the pound. Polls have varied over the course of the weekend with one showing an eight point lead for the Yes campaign. The others have continued the broad trend of showing that the referendum is too close to call. Rallies have taken place through the country over the weekend and we will see more polls as we come into the vote. Initial results from some voting regions will be due at around 2.00am BST with Edinburgh and Glasgow only reporting at around 5.00am; it will be a long night for us poll watchers. We will of course be live-blogging and tweeting the impact of the results as we get them on the pound and sterling assets.
The TLTRO lending operation from the European Central Bank on Thursday should prove to be a euro positive, we think. Any policy or liquidity drive that shows markets that the ECB could delay a move towards a QE plan that purchases sovereign debt should allow the single currency to strengthen.
Despite all of this, the largest shifts overnight have once again come in AUD crosses. A poor Chinese industrial production this weekend has once again taken the Aussie lower as traders increase bet that fears over a weak domestic demand picture will drive a further injection of monetary stimulus from the People’s Bank of China. It looks all but certain that AUDUSD will break below that 0.90 level in the early part of this week.
