The dollar index largely trades within 94.0-95.0, which kept the euro in a similar bind. Same for the Japanese yen, where USD/JPY was capped below 120 but supported above 119. AUD also stabilised within 0.72-0.74 with the 0.70 area clearly a strong support zone.
Bullish bets on the dollar have waned in recent months after the Fed left rates unchanged time and time again. We saw around a 50% drop in long USD holdings this year from speculative funds, as they shift expectations of a rate hike out to next year.
One reason for this changing outlooks is the tightening financial conditions in the US, which reduce the need for the Fed to be hawkish. They have already ‘achieved’ tighter monetary conditions without raising interest rates!
The probability of a rate increase in October FOMC has dropped as low as 6%, effectively saying a resounding no, according to Fed fund rate futures market. Even a December move is looking increasingly unlikely, especially the incoming US data turn out to be soft.
To be sure, there are some expectations that we could see some bold actions or at least bold language in two of the three major central bank meetings, namely ECB and BOJ. However, recent rhetoric seem to point towards a ‘status quo’ stance. ECB governing council member Noyer said on Tuesday that the current QE programme represented just the right amount of stimulus, and is transmitting to the economy.
BOJ governor Kuroda reiterated on Monday that the QQE plan is having its intended effects on the economy, which he said continues to recover moderately. These statements encouraged talks that we may not see any action from ECB or BOJ in late October.
Needless to say, I feel the lack of any monetary policy impulses will keep the currencies market in a flux. The JPMorgan Global FX Volatility Index is heading for its largest monthly decline in October, after jumping to recent highs in August and September, as bets for FOMC action remain elevated. We probably need to get these events out of the way to form a clearer view of where the currencies are heading in the near term.
Looking to Asia
A sluggish US session following an equally weak European trade points towards a tepid start to Asian equity markets. Australian shares began on a slippery note, while Japanese equities were higher in early trade.
Hong Kong is away today, and we will keep an eye out on China, following yesterday’s solid rally in smaller-cap stocks. For the Shanghai Composite, the 3500 level remains the key barrier to break. I expect stiff resistance above this handle, as those who bought when the market was above this level, expecting state buying to prop up prices, will be keen to get rid of their stock holdings.
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