From the Floor: Mildly upbeat ahead of crunch central bank meetings
By Clare MacCarthy
- Modest oil gain boosts risk-on sentiment – Liu
- BoJ and FOMC meetings Wednesday are the week's key events
- "Will they/won't they" narrative misses the salient point – Hardy
- There's only a very slim chance of a hike on Wednesday
- Vols continue to underperform – Larsen
- Oil pretty close to the bottom of the range – Hansen
- Bayer/Monsanto deal might still fail – Boye
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Asian equity markets and US futures finished Monday's sessions modestly higher despite a weaker close on Wall Street Friday and the explosions in New York over the weekend, Edmund Liu reports from the Singapore trading floor for Saxo Bank's regular morning call. Risk-on sentiment was buoyed by a modest rise in oil prices following a renewed outburst of violence in Libya. Meanwhile, Japanese markets were closed Monday for a holiday (and will be closed again on Thursday) while the opening of the Australian bourse was delayed by a technical glitch.
But the real focus of the week is Wednesday's pair of central bank meetings, where first the Bank of Japan and then the Federal Open Market Committee decide on the monetary policy trajectories of their respective economies.
On Friday the USD jumped in response to US inflation data showing a 2.3% increase Y-o-Y in core CPI, a rate which matched the previous post-financial crisis high This, coming as close as it does to the FOMC meeting "keeps the plot plenty thick", says John J Hardy, Saxo's head of FX strategy. One key point to note, Hardy says, is that the media narrative is focusing almost exclusively on the "will they/won't they hike rates", whereas he believes the salient point is "the overall theme shift away from quantitative easing and towards fiscal policy".
That said, (and despite Friday's unexpectedly strong CPI), expectations that the Fed will increase rates this week have melted away to just 20% (chart above), and a separate proprietary survey by the Financial Times pegs the probability even lower at just 15%.
Friday's CPI-inspired selloff in EURUSD saw the pair move lower through the 1.1200 support level, returning the focus to the pair's 200-day moving average, Hardy says. "It's clear that something's going to happen, given the 61.8% retracement level is at 1.1109, so there's the possibility of a shift lower to 1.1000," he concludes.
Dan Larsen, of the FX options trading desk, also has the 1.10 eurodollar level in his sights: "Vols are still underperforming and we would need to break this level in the coming trading sessions as otherwise we could see a drop in volatility again".
Sell-off Friday took out 1.1200/50 pivot area – next key is 1.1100/25
In the commodities sphere, meanwhile, the strong US inflation print on Friday has piled pressure on gold and this, combined with the stronger dollar, sees the yellow metal struggling and looking for direction, reports Ole Hansen, Saxo's head of commodity strategy.
The action is livelier in crude oil: It got a boost over the weekend as the first scheduled shipment out of Ras Lanuf in Libya since 2014 was halted by fresh military clashes there. Still, oil is "pretty close to the bottom of the range and a price of $47.25/barrel for Brent is probably as far as gold could go at this stage," Hansen says.
Gold trading close to the edge ahead of FOMC. $1,300 and $1,350 the big levels
Finally, the upcoming central bank meetings are keeping a definite lid on action in the bond markets. "We can expect some very quiet sessions ahead of the FOMC meeting," says Michael Boye of Saxo's fixed income trading desk. One thing to keep an eye on in the corporate bond market is the Bayer/Monsanto merger: regulatory hurdles imply a risk that the "deal still can fail" Boye notes.
Time to start focussing on the politicians instead of the central bankers? Photo: iStock
Clare MacCarthy is deputy editor at TradingFloor.com
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Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.