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The US dollar retreat was the dominant theme in US trade and seemed to have set Asia up for some gains. Traders focused on the Labour Market Conditions Index release, which showed slow jobs momentum in September. This reading combines 19 labour market variables and showed a moderation in the reduction of slack – enough to trigger some profit taking on a hot USD as the dollar index dropped from a four-year high.
The majors, along with emerging market currencies, all managed to regain some ground against the greenback. However, this move seems temporary to me as the fundamentals still largely play into the hands of the USD.
Later today, we have Fed members speaking, including Kocherlakota and Dudley. Any further hints of a hawkish shift following the recent jobs reading would be supportive of the USD. Esther George has already made some comments through Asian trade, which were on the hawkish side.
I suspect this is why we’ve seen some life, although limited, come back into the greenback. She said it is time to start talking about normalised Fed policy and that FOMC participants expect rates to rise in 2015. She also expects to see wage growth as the labour market normalises, as well as inflation rising over the next year or so. Tomorrow’s FOMC meeting minutes will also be particularly interesting as investors search for signs that an increasing number of Fed members dissented.
Japan rallies off lows
After a poor start, Japan has come off its lows, helped by the recovery we’ve seen in the USD through Asia. USD/JPY has popped back above ¥109.00 and the Nikkei is now flat after having been down around half a percent. While nothing was expected from the BoJ today, Governor Kuroda is reported to have delayed the meeting as he appeared before parliament.
There has been plenty of talk around BoJ board members dropping their 2-year timeline reference for the inflation target. The question is, does the BoJ step up its efforts to reach the inflation target within the timeframe, or does the central bank yield and drop the timeline reference. Whichever way, these outcomes are likely to lead to further yen weakening.
However, we have now got to the stage where further yen weakness only marginally lifts Japanese equities. Therefore, further yen weakness without the assistance of other policy measures is unlikely to jolt the economy to the extent the BoJ would want to see.
RBA remains on hold
The ASX 200 has experienced some wild swings today, with the banks and other yield plays driving significant downside. Having said this, the headlines have been around rumours of a Glencore-Rio Tinto merger.
RIO predictably flew out of the blocks and has been bid for most of the day as speculators debate the possibility of a tie-up. However, many analysts have flagged it as unlikely, given the significant regulatory challenges it would face and the lack of value for RIO shareholders unless there were a significant premium. While there are some advantages, it certainly seems the cons outweigh the pros. It’ll be interesting to see how its UK-listed stock responds after having enjoyed mild gains yesterday.
The RBA left rates on hold as expected today but the statement finally saw some changes after remaining almost identical in past months. Perhaps the biggest change was around the AUD, where the RBA acknowledged the recent decline, and then went on to add it is offering less assistance than what would normally be expected in achieving balanced growth. Overall though, the key line of a ‘period of stability in rates’ was maintained. That’s the most significant with regards to rates.
A weaker open for Europe
Looking ahead to the European session, we’re calling the main bourses weaker. The sharp recovery in the euro wouldn’t have helped the situation much, but the currency is likely to be greeted by sellers at some point. On the data front, we have German industrial production and the French Government budget balance as the only releases. In the UK, focus will be on manufacturing production, industrial production and the BoE credit conditions survey. This should cause some volatility for the pound today.