Traders who were hoping for a Santa rally, probably realized by now that he went in the wrong direction. The most realized Santa rally so far in December is in the VIX index, an index that measures market volatility, or as Wall Street traders like call it the “fear index”. VIX traded above 20 for the first time since 16th Nov, as equities in the U.S. tumbled for a third consecutive day, pressured commodity prices continue to feed growth worries, and the Federal reserve decision to hike rates for the first time in 10 years is around the corner.
Dollar index falling 3% from December’s high
Many traders were positioning long trades on the USD as we approach the Fed decision. With market participants pricing more than 85% chance of a rate hike in 16 December a key question arise on whether the greenback rally is over for the year. The USD suffered yesterday its biggest one-day loss in more than 3 months against the safe haven Yen, the EURUSD breached 1.10 for the first time in a month, and even commodity currencies are rallying against the dollar. This signals that a big chunk of the rate hike already priced in and traders are more concerned about the statement that follows the decision, precisely on how gradual the Fed will move in 2016. However, with spread in bonds yields continue to widen between the U.S. versus Japan, Europe, and UK there’s still more room for the USD to strengthen from here as we head into the Fed decision in mid-December.
Aussie and Kiwi rally for different reasons
The NZD rallied more than 100 pips after the Reserve Bank of New Zealand cut interest rates by 25 basis points. You might see the rally in a currency nonsense when a central bank ease monetary policy further, but the fact that RBNZ expects to achieve their inflation target by first quarter of 2016, this sent a signal to traders that the easing cycle is over for now. However, if emerging markets weakness persist and dairy prices remained volatile along with weakness in economic figures, this would open back the door for further easing in mid-2016 creating new opportunities to short the currency, but on the short run the currency likely to continue appreciating especially if equity markets stabilize and carry trades get driven again.
The Aussie was the star of the Asian trading session, touching a high of 0.7333 after employment climbed by 71,400 in November, the highest monthly increase in 15 years while employment dropped to lowest levels since April 2014. The currency had been hit badly on dropping commodity prices and China weakness, but if economic data continues to surprise to the upside, than the currency could have tested its bottom in 2015.
BoE and SNB next
Although none of the central banks are likely to take further easing actions at today’s meetings its worth keeping an eye on the Swiss National Bank. The central bank deposit rate stands at -0.75% since January, and looking at recent economic data, CPI dropped 0.1% in November and 2016 inflation forecast pulled down. Growth, spending, and PMI surveys which recently shown weakness in the economy raised the prospects of further action, but with ECB not expanding its QE program the SNB is likely to hold fire. However, we learned from the bank in early 2015 to remain prepared for surprises.