There is a lot for investors to digest at the moment but the dominant theme is nervous trading in emerging markets as the Federal Reserve (Fed) is tipped to switch to a hawkish bias. It’s a wonder why governments in emerging economies continue to sweat over Fed tightening when the market has had ample time to plan around this. The biggest surprise all week was perhaps the weakness in the US dollar heading into the Fed meeting. The greenback lost ground to most of the major currencies including the yen, euro and sterling. However, there is a bit of a reversal in Asian trade with the greenback starting to regain some ground. This is perhaps some positioning in what seems to have been an oversold greenback.
‘Considerable time’ reference and projections in focus
While the US economy has been progressing significantly, the challenge will be how to proceed given the backdrop of turmoil in the rest of the world. The US has been immune to events abroad so far but perhaps this will worry the Fed enough to exercise caution. The very fact that the USD has been quite subdued this week could suggest traders are not overly convinced the fed will take a hawkish shift in language. We have already been seeing some nervous trading in emerging markets heading into this meeting and it’s a surprise that investors hadn’t planned for this as yet. I don’t think this will play enough of a role to see the Fed hold back and if it does it’ll probably be more of a result of the declining oil price. In fact, before receiving the results from the meeting we have CPI data out of the US. This will help shape up expectations and could even result in some volatility before the Fed release. If the Fed doesn’t change its tone, the projections will be key in determining when we might expect lift-off.
AUD slips in Asia
AUD/USD looks particularly shaky and has now lost its grip on the $0.8200 handle which it had been holding onto all week. I suspect the move has been exaggerated by the fact traders would have been waiting to sell the break of support or perhaps stops being hit in that region. This sees the pair trade at its lowest since July 2010 and headed towards May 2010 lows at $0.8067. On a more positive note, weakness in the AUD has given local shares some reprieve with the ASX 200 reversing yesterday’s losses. Even the energy plays have managed to rally today despite oil prices remaining particularly shaky.
Weak start for Europe
Ahead of the European open, we are calling the major bourses weaker with some of yesterday’s hefty gains set to be erased. Encouraging manufacturing and services PMI readings released yesterday along with the ZEW economic sentiment played a key role in yesterday’s gains. The calendar is not as populated today but the CPI reading will deserve some attention given the central role inflation is taking for central bank policy at the moment. EUR/USD has dipped back below $1.2500 and given its recent outperformance, any disappointing data could see it sold aggressively. In the UK, we have minutes from the last Bank of England meeting along with unemployment and wage data.