As to be expected, financial markets are in a holding pattern ahead of the FOMC rate statement that is due at 14:00EST, hanging with baiting breath to see how the Committee assesses the outlook for monetary policy and the overall health of the American economy. After Asian markets played catch-up to yesterday’s rally on Wall Street, which saw the Nikkei add 1.46% to its valuation, North American equity futures have failed to wander too far from an unchanged reading, while the greenback remains mixed against the majors. The Aussie has been the best performing major currency against the USD so far this session, still eliciting a bid tone from the after effects of yesterday’s resurgence in risk appetite.
There was no tier-1 economic data to speak of during the overnight sessions, but heading into the beginning of North America saw producer prices and raw material prices for the Canadian economy during the month of September hit the wires. Both releases missed expectations with producer prices dropping by 0.4% as raw material inputs decreased by 1.8%, momentarily stemming the steady grind lower USDCAD was experiencing. Hydrocarbons are enjoying a nice bout of buying pressure this morning with front-month WTI edging back into the mid-$82/barrel region, which has benefited the commodity-currency space and has aided in the Aussie and Loonie rally. Though the market is effectively Fed dependent, Poloz’s deferred press conference from last week’s Monetary Policy Report at 16:15EST will be intently focused on by Loonie traders. There is a risk Poloz could be softening to the dovish side in regards to the Canadian economy outside of the housing market, along with Poloz qualifying the Bank of Canada’s decision to remove their forward guidance in reference to “neutrality” on the direction of interest rates.
The main event of today’s trading session will be the FOMC’s interest rate announcement and the accompanying rate statement, but without new economic projections or a press conference from Yellen the statement could easily be a non-event for markets. The crux of the matter is the Fed is getting close to an inflection point with monetary policy, and after the curtains close of their asset purchase program at today’s meeting, it is getting to the point where language in the statement may have to be updated to reflect the changing landscape. Since the last meeting the Fed has witnessed an equity sell-off, collapsing oil prices, and downgrade to global growth prospects, so it’s likely the Fed will err on the side of being cautious or just as dovish as it has in previous meetings. The wording in the Fed’s statement that is most likely to be on the table for being changed is the reference to rates remaining low for a considerable amount of time after asset purchases end, though given the continued concerns around global growth, the Fed may feel it is premature to remove that statement and give markets a false impression the FOMC is bringing its interest rate expectations forward. There has been chatter around the Fed potentially tipping its hat to the drop in oil prices and their concerns around persistently undershooting inflation, though we feel it is too early for the Fed to reverse course and start banging the drum on disinflationary concerns at this point. Given the macroeconomic events that have taken place since the last meeting market participants are expecting the Fed to abstain from making any rash changes to their language and forward guidance, so while the higher probability is more downward pressure on the greenback post announcement, the larger risk is for a hawkish surprise market’s haven’t positioned for.
Further reading:
Quick Fed Preview: 4 things to look out for
USD/JPY: Stay Bullish For A Retry Over 110 Coming Weeks – Deutsche Bank