- Market pegs a December hike at less than 50/50
- Uncertainty heightens importance of upcoming US data
- Tonight the focus shifts to the Bank of Japan
By John J Hardy
Two important things about yesterday’s Federal Open Market Committee statement are the statement itself and the subtleties of the market’s reaction to it. Most importantly, this statement showed a significant upgrade in the FOMC’s hawkishness and a clear readiness to hike rates at the December meeting if the data cooperates – a classic “set-up” statement.
This was clearly USD supportive and the USD rallied across the board, if less impressively so in USDJPY. But if we look over at the reaction in interest rates and Fed rate expectations, the thing that stands out is that the market only very slightly raised its odds of a December rate hike and still judges it at a slightly lower than 50/50 proposition. In other words, the market is saying: “okay we understand that the Fed has upgraded its intention to hike, but we still doubt whether the data will improve sufficiently ahead of the December 16 FOMC meeting for the Fed to actually hike.
As I squawked yesterday
, the two key actual changes to the FOMC statement were (1) the removal of the phrase expressing worries about global developments (awkward that this phrase appeared and disappeared so quickly and a knock on the Fed’s credibility) and (2) the specific reference of “whether it will be appropriate” to “raise the target range at its next meeting.”
Today the focus swings around to Germany’s inflation data later today and the US GDP estimate, which could squeeze fresh USD longs if it is particularly ugly, but doesn’t necessarily have any durable implications if other US data, starting with tomorrow’s PCE inflation data, is USD supportive.
Tonight, we could have further fireworks, this time in JPY crosses, if the Bank of Japan at all changes course here, as the market appears convinced that no new move is in the making.
The FOMC statement keeps the 1.0800 level in focus to the downside, though uncooperative data could put a considerable short term squeeze on fresh USD longs to higher resistance levels in the range before the action then heads back lower again. The first tactical resistance is the 1.1000 area.
Source: Bloomberg, Saxo Bank
USD: Top of the heap now, but incoming data has never seemed more important, and we could see intraday swings either way now through next Friday’s employment report – where a weak number would have the market looking to January or March for a hike and a strong number should actually raise the odds of a December hike more dramatically than did yesterday’s FOMC statement.
EUR: languishing here as the pro-cyclical Fed focus contrasts with coming easing from the ECB and the market plays the central bank policy divergence card. Local resistance is now 1.10 and the next focus to the downside is the 1.0800 area ahead of the cycle lows below 1.0500.
JPY: Staying resilient with the Japan CPI and Bank of Japan up tonight – market clearly not expecting anything at this meeting, judging from the action in the JPY crosses, meaning the surprise in the event of a mere expression of worry at developments (as opposed to an actual fresh easing) might represent a significant surprise to expectations.
GBP: Sterling following the USD to the strong side as the market upgrades Bank of England expectations – the actual low in EURGBP was right near the key Fibonacci retracement coming in just below 0.7150, with focus shifting all the way lower to the sub-0.7000 lows if . GBPUSD should drop further on strong US data releases in a strong USD environment.
CHF: USDCHF moving nearly as much as EURUSD and clearing the 0.9900, a major technical break that could bring the 1.0130-1.0200+ area into focus provided US data cooperates through next Friday’s US employment report. A pro-cyclical focus also works against the franc’s fortunes.
AUD: Looking lower toward the 0.6900 lows for the cycle eventually, though AUD downside could be more modest than elsewhere if risk appetite remains resilient.
CAD: Sharp rally in crude oil prices yesterday sees the CAD finding some resilience in the crosses and would expect the broad CAD picture to align somewhat with the strength of the US data (so strong US data seeing CAD stronger versus AUD and NZD, for example, if not the USD.)
NZD: Weaker on the back of the Reserve Bank of New Zealand as the central bank keeps the focus on rate cuts and objects to the kiwi appreciation – is AUDNZD finally in a bottoming out process and is NZDUSD ready to work its way back to the lows for the cycle in the weeks ahead after the chunky consolidation?
SEK: Market not impressed by quite dovish Riksbank yesterday, as the quantitative easing add-on and lower GDP and inflation adjustments were considered weak beer relative to where EURSEK is priced and the anticipation of the European Central Bank's’s December policy refresh.
NOK: Sharply weaker yesterday on the Norway wealth fund report, but bouncing strongly on the sharp rally in oil prices yesterday – will watch 9.30 in EURNOK for a potential reversal that raises the bearish interest as we are reluctant to chase this one higher if risk appetite remains solid after this energy market rally.
The Fed hawks showed their talons but the market remains unconvinced. Pic: iStock
Economic Data Highlights
- New Zealand RBNZ Official Cash Rate maintained at 2.75% as expected
- Japan Sep. Preliminary Industrial Production out at +1.0% MoM and -0.9% YoY vs. -0.6%/-2.6% expected, respectively and vs. -0.4% in Aug.
- Australia Sep. HIA New Home Sales out at -4.0% MoM.
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Sep. Retail Sales (0830)
- Germany Oct. Unemployment Change (0855)
- UK Sep. Mortgage Approvals (0930)
- Euro Zone Oct. Economic/Industrial/Services/Consumer Confidence (1000)
- UK Oct. CBI Reported Sales (1100)
- US Weekly Initial Jobless Claims (1230)
- US Q3 GDP Estimate (1230)
- Germany Oct. Preliminary CPI (1300)
- US Sep. Pending Homes Sales (1400)
- Euro Zone ECB’s Constancio to Speak (1500)
- New Zealand Sep. Building Permits (2145)
- Japan Sep. Jobless Rate (2330)
- Japan Sep. Overall Household Spending (2330)
- Japan Sep. National CPI (2330)
- New Zealand Oct. ANZ Activity Outlook/Business Confidence (0000)
- UK Oct. GfK Consumer Confidence (0005)
- Australia Q3 PPI (0030)
- Japan Bank of Japan Statement (0300)
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank