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The Fed still dominates central bank events

The highly-anticipated FOMC meeting continues to dominate market sentiments this week, although investors will monitor other events, including several central bank events and the Chinese markets.

Reserve Bank of Australia
Source: Bloomberg

The Australian dollar has a couple of things going for it in the past few sessions. The expectation that the Fed is unlikely to raise interest rates this week, and the Australian government’s new pick for the Prime Minister post, had boosted AUD past 0.7150 early today. Just last week, the currency went as low as 0.6896.

However, today’s RBA minutes may provide more volatility to the AUD. RBA governor Glenn Stevens omitted his regular reference that the AUD was too high, from his post-decision policy statement in August.

The targeted value for the local currency was believed to be at 0.75, and ANZ estimated that the fair value is at around 0.72. The current spot rate is below both numbers, and is seen as favourable by the Australian central bank. Further declines in the AUD could provide some stimulus to the non-mining sector of the country’s economy.

Additionally, the longer-term view that the Fed will raise rates this year, possibly in December, the slowing Chinese growth, and lower global commodity prices, will weigh on the Aussie.

Meanwhile, the Bank of Japan (BOJ) will announce its decision today. Surprisingly, there were two analysts who expected a ¥10 trillion increase to the current ¥80 trillion a year asset purchase programme. Although there are some disappointing data in July, such as the industrial production reading, the BOJ is unlikely to change its sanguine growth outlook.

Furthermore, they might not want to adjust policy without the benefit of hindsight from the September FOMC. The majority of economists agree and expect the Japanese central bank to maintain the present pace of QQE. Nonetheless, the market is watching Kuroda-san closely for any hints of dovishness. If there is further easing, the 30 October meeting remains the odds-on favourite.

The futures market showed a 28% likelihood of the Fed raising interest rates on 17 September. If we are to see anything from Janet Yellen and the FOMC, it will be to continue setting the tone that the rate lift-off is near. Needless to say, a September rate hike will cause violent gyrations in the financial markets, particularly the currency space. According to the JPMorgan Global FX Volatility Index, fluctuations in the FX market remains near a seven-month high.

In Asia, it may be another interesting session as market participants would eye the Chinese equity markets. The smaller A-shares were embattled yesterday while the blue chips received some support.

The PBOC announced that foreign central bank and same-level institutions are able to directly participate in the country’s interbank FX market. They are allowed to trade currency spot, forwards, swaps and options. Unlike commercial banks, these central banks are not required to set aside FX risk reserve.

China continues to press on with its liberalisation plans for the financial sector. Allowing international monetary authorities to trade in China’s domestic FX market is the first step to increasing foreign holdings of yuan as part of their FX reserves.

In the short term, this may help to stem capital outflows. Based on data from the PBOC, yuan positions fell by the most in August, dropping by CNY 318.4 billion to CNY 26.1 trillion. This reflected the PBOC’s intervention to prop up the domestic currency amid accelerated capital outflows.

Straits Times Indexremained under pressure, weighed by the persistent declines in the Chinese markets. We could see another test of the 2850 level, ahead of August lows near the 2800 barrier.

 

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