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We have certainly seen an interesting turn of events with equity markets being led up by the receding of risk-off sentiment at the start of the week, only to find North Korea firing another missile into the end of the week. Despite it being an obvious sign of provocation post fresh sanctions, market have taken this in their stride, looking ahead to what next week has to bring.
Will the Fed sink the dollar once again?
The September Federal Open Market Committee (FOMC) meeting will be the key focal point next week with plans for shrinking the balance sheet and views on further interest rate hikes eyed. The likelihood of us seeing an interest rate change in this meeting will be next to none.
The ‘relatively soon’ pre-empt for the commencement of balance sheet tapering in July’s FOMC minutes long had the markets anticipating a September announcement. Fed members had prepared the market for months to avoid surprising it. While it may be a historical moment for the Fed to start unwinding the massive $4.5 trillion balance sheet, the impact upon markets is expected to be muted and the process, a gradual and predictable one.
This brings the focus to the Fed’s views surrounding interest rates, with the timing of the next rate hike still an uncertainty. The broad view surrounding the Fed’s rate hike path is for changes to be withheld until 2018. Although recent indicators, such as the latest August consumer price inflation, have strengthened the case for a lift-off in December. The US debt market had also spoken with a steepening of the yield curve.
Having said that, December may be a perfect storm for the US dollar and the Fed with debt ceiling, tax reform developments and 2018’s outlook to juggle. The Fed may have to address the fact that there lies ahead uncertainty and this could be net bearish for the US dollar, one to keep for the radar. Meanwhile, pressure from soft inflation numbers may have eased slightly this month, but as with past meetings, should we see a sustained display of concern from the Fed, it could undo some of the US dollar reversal of late.
BoJ, steady as she goes
The Bank of Japan (BoJ) meeting follows in the heels of the Fed FOMC decision with no change in monetary policy expected, providing little for the market to draw inspiration from. This may well be the case until 2019 with stubbornly low inflation figures out of Japan. USD/JPY movements would therefore be a function of the reaction towards the Fed in the coming week.
Besides the Japanese central bank meeting, central banks in Taiwan, Indonesia and Philippines will also convene with no changes in interest rates expected. On the data end, inflation updates from Malaysia will be due while August’s trade updates comes out of Japan and Thailand.
For the local Singapore market which had been under pressure into the latter half of the week, Monday’s release of August’s non-oil domestic exports (NODX) numbers will be watched. The realisation of an upturn in NODX would be positive for the industrial sector and a welcoming relief for the Straits Times Index which had recently touched a 2-month low.