It certainly seems to be the calm before the storm for global markets, with activity set to ramp up once Fed comments start hitting the wires. There seems to be varying opinion on what the Fed will do, with tapering expectations split between $10 billion and $15 billion. The composition of this amount is also debatable but it is most likely to come out of US treasuries as opposed to mortgage backed securities. At the same time there will be strong emphasis on forward guidance as many Fed officials now actually feel asset purchases are becoming less effective.
Analysts are expecting clarification on whether the 6.5% unemployment threshold is conditional on a return of inflation to the 2% target. The most dovish thing the Fed could possibly do would be lowering the unemployment threshold. Once these thresholds are achieved we could start to see a change in the Fed funds rate.
Traders will be looking out for moves in the USD and treasuries; influencing the rest of the market. AUD/USD bottomed at 0.9285 on the back of the RBA minutes yesterday and has since recovered to 0.936. RBA assistant Governor Malcolm Edey will be on the wires today and traders will be keen to hear more on the current wait and to see rate stance.
At 11.30 AEST we get China August property prices and they always threaten to throw a few curlers to the price action. However with China closed Thursday and Friday, we feel most of the volatility will be on the USD side of the equation. Range between 0.93-0.94 is likely to hold till then.
The rest of the risk currency pairs have also been fairly sidelined with EUR/USD treading water around 1.335 and GBP/USD at 1.59. At 18:30 AEST we get BoE minutes and the market will be keen to explore for signs of how robust the bank sees the recovery. Cable is overbought at present, although we feel pullbacks should be supported.
USD/JPY has been consolidating above 99 for a while now and we feel this will continue to be the case until tomorrow when event risk comes in thick and fast, starting with the Fed and BoJ Governor Kuroda’s speech.