Article / 28 October 2015 at 9:31 GMT

From the Floor: Fed could set up December hike

Consulting editor / TradingFloor
Norway
  • Announcement from the FOMC due at 1800 GMT
  • A hawkish statement could set stage for December rate rise
  • Dovish scenario is for a clear delay in Fed tightening
  • Either way, markets expect more carity from the FOMC
  • Yen firm ahead of Friday's BoJ meeting, Aussie hit by disappointing CPI

From the Floor
 

By John Acher

Markets are on the edge of their seats, waiting for word from the US Federal Open Market Committee meeting later today (announcement due 1800 GMT) that could provide direction. Any particularly dovish or hawkish surprise would deal a major jolt to jittery markets.

Central banks hold centre stage this week, with the Fed meeting followed by a policy statement an hour later on Wednesday from the Reserve Bank of New Zealand and the Bank of Japan on deck Friday.

”It appears from various noise that the Fed is going to try to manufacture a pretty clear statement on what the market should expect after some recent embarrassing forward guidance that failed to materialise from the summer’s market-disruptive events,” says Saxo Bank's head of FX strategy John J Hardy.

But bets are still being placed on dovish and hawkish scenarios from the Fed meeting, which will only issue a statement, not a rate decision.

”The dovish scenario is a clear delay, (and) that there won’t be a move in December," says Hardy. "The more hawkish scenario — the one I lean towards — is that this meeting is a clearer set-up for an actual December move." 

"There would be plenty of surprise if that does prove the case, and dollar supportive.” 

In the dovish scenario, the Fed could indicate that a hike would take place in early 2016, and try to shore that up by saying "Look, we’ll eventually be more hawkish if the data move our way,” Hardy says.

Soft September retail sales data from Japan this morning and disappointing CPI from Australia pointed towards a further slowdown and increased chances of monetary easing from the Bank of Japan and the Reserve Bank of Australia, and the Aussie plummeted.

"The Bank of Japan is also very much in play, with a policy meeting on Friday," says Hardy. "There is a lot of noise around this meeting.”
The yen has been quite strong, so any policy move by Japan combined even the least bit of hawkishness from the Fed would see dollar-yen pulling sharply higher, as the market seems quite convinced that the BoJ won't do anything this week, Hardy says.

Aussie-dollar pierced the 0.72 area support, which was a key break. "We’ll be looking for a test of the trendline and eventually towards those 0.69 area lows,” Hardy says.

AUDUSD plummets as weak CPI boosts RBA rate cut expectations for next Tuesday
AUDUSD
Source: Saxo Bank 

The Swiss franc has softened against the euro despite the ECB’s dovishness. ”We could be seeing a new leg up out of the range, if we get a solidly hawkish and dollar-supportive response to the FOMC,” Hardy says. "So watch that (USDCHF) 0.99 area, which opens up for parity, and the 1.0130 post-January 15 highs for dollar-Swiss.” 

Asian equity markets were mixed, with Japan's Nikkei up and China's Shanghai Composite and Hong Kong's Hang Seng falling on Wednesday.European stock markets opened stronger.

Oil defensive

Oil prices firmed modestly after three sessions of losses, with WTI crude rising to $43.55/barrel and Brent up to $47.15/b.

The oil market is waiting — in addition to the FOMC — for a new inventory report after figures from the American Petroleum Institute on Tuesday showed a 4.1 million barrels rise in oil inventories, above an expectation of 3.4 million barrels, which put renewed pressure on oil.

The API inventories figures were a negative driver, pushing WTI and Brent crude lower.

And the outlook is for continued rising inventories in the near term, Saxo Bank's head of commodities strategy Ole Hansen says.

"We did manage to find some support in WTI at this retracement level $42.80/b, we’re now at $43.10/b so we’re still close to that, and the market is still in defensive territory ahead of the announcement later today,” Hansen says.

WTI crude. Oil consolidates ahead of inventory data and FOMC
WTI oil price
 




















Source: Saxo Bank

Gold and silver holding up

Gold and silver held above key levels on increased bets that the Fed would not do anything any time soon, and potentially not also in December.

"So the (gold) market is moving a tad higher, and we could be looking at a potential bullish flag formation today," says Hansen.

A rise in gold above $1,173/oz could open the way for additional upside, Hansen says. "It depends on how much traders want to accumulate before the announcement later today, so we could see some profit-taking as well. But overall the market is in good condition as long as we stay above $1,158/oz."


Fed building
 Blue skies over Federal Reserve building in Washington, DC. Photo: iStock


John Acher is consultant editor at TradingFloor.com


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