Ahead of what is set to be an exceptionally volatile day throughout the capital markets shares across Asia and in particular, China and Australia, ended down following Wall Street’s lead in taking a ‘risk off’ tone prior to the Federal Reserve’s policy statement set for this afternoon. With the FOMC set to release its meeting minutes, outline interest rate policy as well as the release of quarterly GDP numbers for the United States. All eyes are on the Fed as markets wait in trepidation for guidance for what the future holds in light of a quarter’s worth of disappointing employment and corporate earnings data out of the United States.
Fed watching hasn’t been the only thing driving markets today, even considering a recent backdrop of jittery markets the aussie dollar has been notable for its volatility. Earlier, the antipodean currency cracked the .80 mark against the USD capping off five days of gains, with a 2% gain on Tuesday, as markets re-evaluated the potential of a rate cut on the part of the Reserve Bank of Australia next week. With many participants no longer certain that a rate decline is in the cards, movement in the AUD has been profound. Right now the aussie is just below its earlier highs, trading in the low 0.80 range versus the dollar, with the kiwi dollar sits in the low .77 level versus the same. Also, with the Reserve Bank of New Zealand also set to release its interest rate policy later today it’ll be wise to watch the southern currencies as price action in both should be expected to be choppy.
Outside of Asia, the slide in shares continues in Europe as investors take a more defensive posture ahead of the Fed. In the UK, Britain’s biggest business lobby released retail sales data for the current and prospective months. While the current figure missed expectations, retailers remain optimistic about the future with 40% expecting May sales to be greater this year than last. On the back of this and the greenback’s widespread retreat, the sterling touched two month highs against the USD, with the currency pair trading in mid-1.53 handle. In reference to the euro, the sterling remains largely unchanged versus its continental counterpart trading in .71 EURGBP range. In a surprise move, the Riksbank of Sweden opted not to move interest rates further into negative territory, which propelled the Swedish koruna nearly 2 percent higher versus the USD. This policy decision was driven by a return to inflation within the Swedish economy, which while still largely missing the Riksbank’s target of 2% is now at least in positive territory after February’s decision to cut interest rates to -.25%.
Prior to the opening bell in North America, the story unfolding in the rest of the world remains the same locally with the market weighing up the timing of the Federal Reserve’s possible interest rate rise and with the fed announcement set for later today. Equity futures are down, signalling that trading will kick off on the back foot, however, more substantially the US dollar’s ascent has slowed, allowing a number of currencies to gain ground with the loonie being no exception. The loonie has returned to levels not seen since the surprise rate cut on the part of the Bank of Canada in late January, now trading in the low-1.20s versus the buck. While it is expected that this reversal will be short lived it does present a favourable opportunity for importers to hedge out their future requirements. With BoC governor Poloz outlining expectations that the second half of 2015 will be more robust than a first quarter that was beset by a collapse in oil prices it is really the tone of the Federal Reserve later today which will dictate the direction of the dollar versus the loonie. Either way, the fed makes its announcement we can expect outsized volatility across all asset classes which is something to be prepared for.
Further reading:
EUR/USD: Bears Get Ready; USD/JPY: Bullish & Long – BofA Merrill
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