Focus On FOMC And Bank Of Canada, After Reserve Bank Of New Zealand Disappointed

The US dollar is mixed against the G10 currencies today. The outlier is the New Zealand dollar, which has been punished in response to the unexpected standpat decision by the central bank, the first of five G10 central banks that meet this week.  It is a warning shot to the Bank of Canada.  Governor Macklem had seemed to provide hawkish forward guidance in a recent speech and the market responded accordingly. However, economists are divided. The Canadian dollar is vulnerable to disappointment.  

The Federal Reserve is widely expected to standpat.  Although Chair Warsh eschews forward guidance, other parts of the Fed’s leadership apparently do not share his qualms and helped ease market speculation of back-to-back hikes.  Still, the markets are anticipating a hike at the December meeting. The ECB meets tomorrow and is also seen on hold ahead of another hike in December.  The BOJ meets Friday and does not appear prepared to hike rates at back-to-back meetings.  

Prices 

G10

• The euro could not get much above $1.1150 in North America yesterday, where options for around 1.35 bln euros expire today.  It settled softly near session lows (~$1.1120) and slipped a little further to test the year’s low set mid-Oct, slightly below $1.1115. It still looks vulnerable. The short-term market looks like it does not want to go into the FOMC meeting short dollars. 

• The dollar rose for the third consecutive session against the Japanese yen yesterday. It reached almost JPY158.  It poked slightly above there today before pulling back to about JPY157.65 in early European turnover. This is a nearly month-old congestion area on the charts, options for almost $830 mln at JPY158.50 expire today, and 200-day moving average is near JPY158.55.  The month’s high, recorded on October 14 was slightly shy of JPY159, though the dollar has not closed above JPY158.65 this month.  A close below JPY157.35-40 would weaken the greenback’s tone.

• If the short-term market does not want to be short dollars ahead of the FOMC statement, it does not want to be long sterling ahead of the budget announcement. Sterling recovered the high for the month last week near $1.3420 and yesterday came within a 5/100-of-a-cent of $1.33.  Today, it slipped through the bottom of the band of support that extended to $1.3280, which is around the 20-day moving average. It traded firmer in the European morning but has been unable to re-establish a foothold above $1.33. 

• The US dollar snapped a seven-day drop against the Canadian dollar on Monday and consolidated firmly yesterday below CAD1.4055. The greenback posted an inside day yesterday but settled above the five-day moving average for the first time in two weeks. The US dollar rose to almost CAD1.4070 before stabilizing. The Bank of Canada’s decision is announced at 9:45 am ET.  While the swaps market is discounting slightly more than an 80% chance of a hike, Bloomberg’s survey shows economists are nearly evenly divided.  The Canadian dollar’s losses if the Bank of Canada stands pat, we suspect, would be larger than the gains on a hike. The US two-year premium over Canada has narrowed by 25 bp in a little more than the past two weeks.  And the Fed’s likely hike next month will restore the policy rate spread.  

• The Australian dollar traded firmly but still range-bound yesterday. The session high was set in North American but could not get above Monday’s $0.7040 high. That said, it held above $0.7000 for the third consecutive session.  The firmer than expected CPI spurred increased speculation of a hike next week and this helped lift the Aussie to $0.7055.  The momentum was not sustained and the it pulled back slightly below $0.7030 before consolidating. The Reserve Bank of New Zealand defied expectations for a hike, stood pat, and watch the New Zealand dollar slumped around 1.7% in disappointment.  It settled near $0.5680 yesterday and dropped to $0.5585 before steadying. 

EM 

• The Mexican peso fell for the first time in three sessions yesterday, while the Brazilian real continued to claw back more of its steep initial losses in reaction to Lula’s unexpected victory. The US dollar traded firmly within Monday’s (~MXN18.5250-MXB18.7610) range. It edged above yesterday’s high earlier today but is a bit heavier in the European morning. It traded to about MXN18.6440 in early European turnover. The dollar settled near BRL4.98 before the weekend and was quoted near BRL5.6050 on Monday. Yesterday, it traded a little below BRL5.31 before consolidating around BRL5.35. 

• Even as the dollar rose against most of the G10 currencies yesterday, it fell against the offshore yuan. It recorded an ostensibly bearish outside down day that took it to a new multiyear low near CNH6.6635.  The dollar is recording an inside today. The PBOC shaved the dollar’s fix today: CNY6.7165 (CNY6.7171 yesterday). Monday’s cyclical low was CNY6.7162. 

• The dollar bottomed against the Indian rupee last week around INR94.3225. It pushed back above INR95.00 on Monday when it reached INR95.2635.  It traded quietly yesterday, and after holding above INR95.00 today pushed to new session highs, above INR95.25, into the close. It was a favorable dollar close. 

Other Markets

• The US Nasdaq closed firmly and above opening levels yesterday.  The semiconductor index rose by more than the 3%, the most in more than a month, and the third consecutive gain. Microsoft and Alphabet report late today (after the FOMC and press conference). Most of the large equity markets in the Asia Pacific area advanced earlier today, with Australia and India notable exceptions.  South Korea’s Kospi was lifted by 6.6% with the help of favorable earnings news from SK Hynix.  Europe’s Stoxx 600 is a bit softer after rising Monday and Tuesday. S&P 500 and Nasdaq 100 futures enjoy a firmer bias.  

• Benchmark 10-year yields were little changed at the close yesterday.  The 10-year French yield edged a couple of basis points higher, but most of the other G10 bonds were +/- less than a basis point. Yields are firmer today and the peripheral premiums in Europe are widening a little. Most yields are 1-2 bp higher.  The 10-year US Treasury yield is straddling the 5% level. 

• Gold shined yesterday. It rose by slightly more than 1% yesterday, its biggest rise in about two-and-a-half weeks. Gold reached almost $4066 and edged to almost $4071 earlier today, the lower end of a band of resistance that may extend to around $4075. The upside momentum has stalled, and the yellow metal is traded below $4055 late in the European morning. The five- and 20-day moving averages are still falling. Silver recovered from the marginal new low for the year (~$52.65) yesterday and reached the session high (~$54.55) in North America. It took out Monday’s high by a few cents, but was unable to close above it, which would have had greater technical significance. Still, a close above $55 would be constructive.  It is trading heavier now and is near $53.75. 

• December WTI broke down yesterday. It settled below $100 for the first time in three sessions. There are two known unknowns: the new diplomatic initiative by Middle Eastern countries with Iran, and the implications of the Israeli election. However, speculation of a new hostilities after next week’s midterm US elections, has seen the contract recover today. It reached almost $102.25 as it trades firmly in yesterday’s range. Recall that last Friday, the contract reached almost $104. 

Data

• The US reports September goods trade and inventory figures ahead of the session highlight, the outcome of the Federal Reserve meeting.  A clear consensus has emerged for a standpat decision today but a strong conviction of a hike in December (90%+). Under Chair Warsh the statement tends to be terse as if it has been downgraded as a communication tool.  Warsh may eschew formal forward guidance, but the market took its cues from comments by other Fed officials and recognized the bar to back-to-back hikes was higher than many initially appreciated. 

• The Bank of Canada meets today. As recently as October 16, the market had leaned against a hike.  However, slightly firmer than expected headline CPI and hawkish comments by Bank of Canada Governor Macklem encouraged the swaps market to discount the likelihood of a hike.  The odds rose from about a 1-in-3 chance to almost 85% chance before the weekend. As seen by the New Zealand dollar, the Canadian dollar would likely sell off if the Bank of Canada does not deliver.  We suspect the US dollar could rise toward CAD1.4135-50 on such disappointment. 

• UK Chancellor of the Exchequer Healey presents the government’s budget. It is expected to contain small tax and spending measures.  It will be modest compared with the broad vision that PM Burnham has sketched. It will likely result in around one-third smaller projected fiscal cushion (GBP15 bln) than the government inherited (~GBP23.5 bln).  While the budget is expected to have many modest measures, the financial markets may be sensitive to whether he does forward, over the apparent objection of some officials, with returning the bank profit surcharge to 8% from the 3% that the previous Tory Chancellor (Hunt) had cut. Freezing the fuel tax, which was set to increase in January and March will be a more popular decision as will extending the “warm house” GBP150 bp tax rebate. The minimum wage is expected to be raised. Earlier this week, Burnham pushed back against growing expectations that he would call for an early election to secure a proper mandate.  He seeks to reposition the UK in light of the developments in the US and European security needs and the UK’s underperformance since Brexit. This seems part of the discussions being held that will culminate on November 20 in the UK-EU summit. 

• Australia reported firmer September and Q3 inflation and this keeps the central bank meeting on November 3 live.  September CPI rose by 0.8% for a 4.3% year-over-year, slightly more than expected.  It is the highest reading since March. The quarterly print more than doubled to 1.3% from 0.6% in Q2. The trimmed mean readings in September and Q3 were slightly firmer than the August and Q2. In the futures market, the odds of a hike next week were lifted to 80% from about 60% yesterday.  

• By a 4-3 vote, the Reserve Bank of New Zealand surprised the market and kept policy steady at 2.75%.  The central bank’s statement acknowledged that tighter monetary policy is likely to be needed, but it remains conditional on the economic outlook. The RBNZ had hiked rates in back-to-back meetings (July and September). The swaps market is discounted around an 85% chance of a hike at the next meeting in December.  Note that New Zealand holds a general election on November 7. Polls show a close contest.