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The sentence that sunk a thousand currencies

A new sentence in the Fed monetary policy statement has put a December rate hike by the Fed back on the table.

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
Source: Bloomberg

G10 currencies slid against a resurgent USD, while the worst was left for emerging market (EM) currencies. The Korean won, Indonesian rupiah and Malaysian ringgit saw the heaviest selling in Asia. Equity markets across Asia initially opened positively, but the hawkish Fed statement and strong Japanese industrial production data put in doubt any further expansion of monetary easing by the major central banks in the near term.

Ahead of the meeting, bond market pricing was giving a 4% probability to a rate hike at the October meeting, and markets were clearly positioned for some very dovish commentary from the Fed. Instead, an explicit mention of the necessary developments for a rate hike at the next meeting was made clear in this sentence:

“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.”

That “next meeting” mention saw currencies drop sharply against the USD, as the DXY dollar index rallied 1.1%.

But the other major macro development overnight was the big 6.3% jump in WTI oil. The US Energy Information Administration (EIA) released data that showed refineries were operating at 87.6% of capacity after hitting a low of 86% on 9 October. This has spurred speculation that the usual autumnal refinery maintenance season in September and October is coming to an end and could start processing larger amounts of crude.

This bout of USD strength and oil strength creates some divergent FX forces, particularly for the oil-related currencies. The Canadian dollar lost 1% in the wake of the Fed announcement, while the Norwegian krone and the Malaysian ringgit lost 1.7% and 1.2%, respectively. All three currencies have weakened considerably as WTI oil steadily declined from its high of US$50 a couple of weeks ago. And yet many of those currencies were rallying ahead of the Fed announcement in the wake of the refinery capacity data.

This now sets these currencies up for some divergence. After being battered by the Fed, they could be set for a turnaround if the oil price continues to see some short-term upside. The Baker Hughes oil drill rig count expected on Friday will no doubt have some influence on how oil trades into the end of the week. Nonetheless, WTI oil does look to have found a short-term bottom after touching as low as US$42.56 on Tuesday – which the strong 6.3% rally overnight supports. Certainly in this dollar-strong oil scenario, going short USD/NOK looks compelling.


The ASX had a very volatile day as quarterly earnings reports drove some strong sectoral divergence amidst general negativity about the hawkish Fed statement.

Woolworths was the instigator of negative sentiment on the ASX today. WOW’s earnings results managed to disappoint on all fronts and downgraded their 1H16 guidance. Like-for-like store sales further decreased, declining 1% from 0.9% the previous quarter. Masters home improvement saw strong sales growth, but unlikely enough to dispel speculation that it should be shut down or sold off. Big W saw like-for-like sales improve from the deep negative territory of -11.7% to -8.1%, but private equity houses will still be very interested in taking it off WOW’s hands. WOW’s stock rapidly fell 9.7% at the open.

But the negativity spread over to the entire consumer-focussed sector as Wesfarmers saw its stock decline by 5.1%, Metcash by 9.7% and Dick Smith by 6.5%.

On the other side of the market, the continued strong growth of Chinese consumption was evident in Blackmores outsized performance. At one point the stock touched the $200 mark from a close yesterday of $155.45. Earnings came in strongly above expectations particularly in their sales to China, when they announced a partnership with Bega to begin selling infant formula into China in early-2016. Blackmores, as a high-quality vitamins manufacturer, is an excellent example of a ‘New China’ stock. These are the stocks well-positioned for a more mature and discerning Chinese consumer. While growth continues to slow in China, elements of the consumer market continue to see outsized growth. AmorePacific in Korea and Okamoto in Japan have seen similarly strong stock performances with this investment theme. While in the Aussie market, names like Bellamy’s and Vitaco have performed well in this ‘New China’ segment and privately-held Swisse was recently bought out for $1.7 billion. The big question is, how long will the rally continue for these stocks?

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CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.