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You know what, I reckon a December Fed rate hike might be on the cards

FX markets were brutal overnight as everyone battened down the hatches and fled for higher ground in the USD and the JPY.

Federal Reserve
Source: Bloomberg

The DXY US dollar index surged 0.8% to 97.66 as the return of US bond markets from their Monday holiday saw the US 10-year yield jump by 3.52 basis points. But despite that surge, the JPY still strengthened 0.2% against the USD, and substantially more against almost every other currency. And get ready for some fun around the CNY fix today at 12:15pm AEDT after that big USD rally, the USD/CNY looks like it will easily hit a 6.8 handle before December.

Britain, Britain, Britain. Now, I’ve got some good news for our UK friends, the pound rallied over 2% against the South African rand overnight. The bad news is that the pound continued its 'hard Brexit' freefall against almost every other currency, taking a leaf out of Donald Trump’s poll numbers’ book (hopefully some auto-correlation machine learning FX algo is trading off this). The pound dropped a further 1.9% against the USD to US$1.2135 and even touched an intra-day low of US$1.2090. Adding further evidence that Friday’s GBP 'flash crash' was highly unlikely to be a fat finger and more just an example of how negatively positioned the market already was.

And the ZAR got itself back into the headlines again by that time-tested method of threatening to remove the well-respected Finance Minister Pravin Gordhan, in the hopes of replacing him with a more happy-spending Finance Minister who could shore up the flailing ANC’s support (unlikely). The ZAR dropped by more than 4% against the USD on reports that Pravin Gordhan had been summoned by local prosecutors to charge him with fraud. Given Jacob Zuma’s ANC party has lost almost every major local election this year, evidence that he is prepared to flirt with breaking democratic norms are unlikely to be met positively by markets, given that seemingly the only way he can prevent himself from being turfed out at the next national elections is by taking the country by force. But the political risk seen in the GBP and the ZAR damaged perceptions of emerging market currencies as a whole overnight.

The MSCI Emerging Markets FX index dropped 0.8%, its largest one-day decline since 9 September. While EEM, the main emerging markets ETF, dropped 2.3% in US markets.

The Aussie dollar was not immune to this risk-off move either as it dropped 0.9% to US$0.7539. I’ve noted over the past couple of days that I didn’t think the Aussie dollar was fully reflecting the rising odds of a December US rate rise. The main reason behind this seemed to be the strong performance in commodities, helped in no small part by the post-OPEC meeting rally in oil. But as commodity prices pulled back overnight the Aussie followed them.

The Bloomberg Commodity Index dropped 0.7% as WTI oil fell 1% to US$50.80. Russia had stated that it would only commit to a supply cut once OPEC had formally agreed to a deal. Reuters cited an interview with Rosneft CEO Igor Sechin stating that he doubted Iran and Russia would ultimately commit to a deal. And also there are fears that even if a production cut was agreed upon, US shale producers would take up any extra market share once prices had stabilised above US$50.

Rising yields and the growing certainty of a December rate rise by the Federal Reserve took their toll on equities last night. The S&P 500 had its worst one-day fall in a month, dropping 1.3% to 2137 as the prospect of a higher discount rate began to be priced into stocks.

Asian markets are set for a similar clobbering at the open, especially after the harsh 2.3% drop in EEM overnight, although the China ASHR ETF only fell 0.4%. The Nikkei in particular will not relish the safe-haven buying rally that drove the JPY up overnight.

The ASX SPI futures are pointing to a 43 point drop at the open. And the awful night in commodities does not bode well for the index today, which was underlined by BHP’s ADR dropping 2.4%.

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