Japan notched the highest Small Business Confidence reading since 2006 in September at 50.8, one of the strongest readings in the long history of the survey (it’s only been higher a handful of times since the late 1980s). The retail sales and household spending numbers were also very strong.
The Yen continues to trade with little conviction as market developments elsewhere are offering conflicting signals. The strong bonds markets are somewhat JPY supportive while the raging rally in asset markets are a headwind for the JPY, which has tended to trade in negative correlation with risk appetite for months.
We have a Bank of Japan meeting up on Thursday where expectations are minimal and I would expect JPY crosses to remain more sensitive to Wednesday’s Federal Open Market Committee meeting and the direction that interest rates and risk take in the wake of the Fed’s new monetary policy statement.
The Reserve bank of Australia's governor Glenn Stevens overnight weighed in on the Aussie’s recent strength, suggesting that the currency’s level remains very much in the mind of the central bank. Stevens was very specific in warning that the Australian dollar remains overvalued and that “these levels of the exchange rate are not supported by Australia’s relative levels of costs and productivity. Moreover, the terms of trade are likely to fall, not rise from here.”
There was a fairly sharp response of several ticks in some of the STIR futures out the curve on this speech and AUD took a beating across the board, with AUDUSD looking more firmly bearish now, while AUDCAD may have finally turned the corner as well after a brief visit above parity and the 200-day moving average. It is clear that the RBA will be very responsive to exchange rate moves from here, and this rates AUD a natural sell — particularly in the event that risk appetite ever comes under pressure.
Chart: AUDCAD
The AUD outperformance versus the Canadian dollar may be over after this latest RBA speech. Note that the sell-off here has come around the psychologically important parity level as well as around the 40-week (200-day) moving average.
I would expect AUD to underperform CAD again and we can see that in the longer term perspective, AUD remains expensive versus the loonie.
Looking ahead
Again, we’re in the quiet zone ahead of tomorrow’s FOMC meeting. Looking at treasuries, where the 10-year rate has pushed all the way to 2.50 percent recently, it would appear that the market is expecting virtually nothing in the way of hawkishness from the Fed meaning the surprise side is very much to the hawkish side (or simply that the market has priced in too much dovishness, meaning that a neutral FOMC statement could be hawkish relative to how the market is positioned.)
If this is the case, then the “surprise side” of a recirculation of the taper plans would see risk off, bonds down and the USD up, especially one would guess, against the Euro and EM currencies, but really across the board as well. A dovish outcome might see some USD weakness, though it may not be sustainable for more than a few days.
Watch out for the delayed US September Retail Sales report up later today, which could move a nervous market ahead of tomorrow’s Fed meeting, as could tomorrow’s ADP number for October and CPI data (as the Fed has mentioned inflation more prominently recently and the YoY CPI core level has dropped below 2.0 percent again.)
The US October Consumer Confidence report for October will also be released, but soft numbers like this may have little impact due to a considerable portion of the data gathering having taken place during the uncertainty of the government shutdown in the first half of October.
Economic Data Highlights
- Japan Sep. Overall Household Spending rose +3.7% YoY vs. +0.5% expected and vs. -1.6% in Aug.
- Japan Sep. Jobless Rate fell to 4.0% as expected and vs. 4.1% in Aug.
- Japan Sep. Retail Trade rose +1.8% MoM vs. +0.5% expected
- Japan Oct. Small Business Confidence out at 50.8 vs. 49.8 in Sep.
- UK Sep. Mortgage Approvals (0930)
- US Sep. PPI (1230)
- US Sep. Advance Retail Sales (1230)
- US Aug. S&P/CaseShiller Home Price Index (1300)
- US Oct. Consumer Confidence Index (1400)
- Sweden Riksbank Deputy Governor Floden to Speak (1700)
- Japan Sep. Preliminary Industrial Production (2350)
- Australia Sep. HIA New Home Sales (0000)