In the hours before the Federal Reserve’s rate statement a cautious mood has beset capital markets with equities, fixed income and currencies all putting in a mixed performance while traders focus in on the Fed for guidance. Kicking off today’s session both the Nikkei and yen rebounded after earlier weakness as today’s retail trade data missed it’s mark, signalling expansion in the Japanese economy is coming in weaker than expected. With this data coming in ahead of the BoJ’s policy announcement on Friday the expectation is that it’s current accomodative stance towards quantitative easing and monetary policy will remain unchanged. Looking southwards, the aussie dollar has taken a tumble in the wake of weak inflation data and a shift in market expectations favouring the prospect of rate cut on the part of the Reserve Bank of Australia next Tuesday. With an economy facing significant headwinds due to the combined effects of a wholesale sell off in commodities and the rapid deterioration of China’s economy, interest rate swaps are now pricing in a 91% chance of a rate cut on the part of the RBA next week. Additionally, policy makers in New Zealand are set to make their own rate announcement later today, while facing similar headwinds as their cousins to the south the RBNZ has already cut interest rates three times this year which has led to expectations that for this meeting at least NZ central bankers will hold off on any additional monetary easing while maintaining a keen eye on the risks fluctuating diary prices and an overheated real estate market pose for the kiwi economy.
Moving onto Europe, things are much more optimistic in the wake of Draghi’s signals to the market on Friday. With inflation in negative territory and the ECB’s firm signal that more accommodative monetary policy is in the offering come December, European stocks are firm today despite an overall tone of caution that has gripped traders across the globe. Outside the common currency bloc, Sweden’s Riksbank has chosen to maintain rates in negative territory while increasing its bond purchasing program by an additional 65 billion Swedish krona. This development has had a subdued impact on the krona with it trading even against the euro while the common currency itself has posted gains on both the sterling and the US buck, coming off the lows plumbed in the wake of Friday’s policy announcement.
Ahead of the opening bell in New York, equity futures are suggest that trading will commence in positive territory as interest rate swaps are pricing just a 4% probability that the Federal Reserve will raise rates today. In light of this, today has seen the USD ebb against its peers including the Canadian dollar despite the latter also being hit by softness in oil prices. This shift in mood is a sharp contrast to expectations in the beginning of 2015 when most market participants were convinced that Q4 would be when the Fed finally raised rates from their historic lows. With continued uncertainty in emerging markets and the rapid decline in China, conditions for global growth have weighed on Federal Reserve policy decisions for the last few months. It is expected that these concerns along with sluggish wage growth in the states will continue to weigh on Fed decision making, with many market participants betting that the first rate rise in nearly a decade will now occur in March 2016. The problem this presents for market participants is that the market can easily get caught wrong footed by the Fed, with the risk growing that any divergence from market expectations in terms of what the Federal Reserve actually choses to do will almost certainly result in an outsized market reaction. Given that, today’s trading in the dollar is likely to be exceptionally volatile which makes the use of market orders appear favourable for both their ability to capture potential upside or position against adverse movements.
Further reading:
Risk off ahead of the Fed – Markets ready for action
More Downside on EURUSD Means More Gains On DAX – Elliott Wave Analysis
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