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Quiet sessions after Fed’s drama

Financial markets have begun the new trading week with subdued price action, as many asset classes stabilize following the volatile end to last week after the Federal Reserve policy announcement.   The overnight Asian session was fairly quiet with Japan on holiday for the first half of the week, but the Shanghai Composite posted a strong session gaining close to 2% as China’s version of the Fed’s Beige Book showed capital expenditures rebounded slightly in the third quarter, potentially illustrating the intensifying slowdown in China might not be as bad as the market currently perceives.   Currency markets have been relegated to tight ranges overnight, with the Fed’s decision to leave interest rates on hold doing little to dash the monetary policy divergence theme that has been underpinning the greenback for 2015.   Fed officials speaking over the weekend reiterated to markets that a rate hike before the end of the year may still be appropriate, confirming the narrative that the Fed would like to get off its haunches before the end of 2015 and begin the tightening cycle.   With the Fed on hold until what will likely be their December meeting, focus now turns to those central banks still able to be more accommodative towards monetary policy, specifically the Bank of Japan and the European Central Bank, the former which could be close to expanding its asset purchase program as soon as next month; the reporting of core inflation in Japan at the end of the week will be a key input into the BoJ’s decision, and a negative reading would certainly bolster the likelihood of that materializing.

Over the weekend the Greek people returned to the polls to vote on the snap election that was called when Tsipras lost his majority back in August, though little changed with Syriza again winning the election by enough in order to renew its coalition with the nationalist Independent Greeks.   The reason the re-election of Syriza has caused little turmoil in financial markets can be chalked up to the fact the current party has little in resemblance to the one that was originally elected back in January, de-clawed by a split that saw a breakaway party formed by ex-Syriza hardliners after disagreeing with Syriza ceding to international creditors demands during the intense bailout negotiations earlier in the year.   While Tsipras did claim after last night’s victory Syriza now has a clear mandate of which to operate within, that mandate is presumably one that will work with the Troika to make good on its earlier promises, and essentially keep Greece from slipping into the abyss.   The Euro is lower against the big dollar to begin the week, though the slight weakness in the common-currency is likely more to do with eyes turning to the ECB and their flexibility to increase or lengthen their balance sheet expansion rather than the re-election of Syriza spooking financial markets.

As we get set for the North American open, equity futures are slightly in the green, looking to staunch the bleeding from Friday’s collapse.   The hydrocarbon market is garnering some interest this morning that has taken front-month WTI back into the $45 range, buoyed by a bullish forecast from OPEC that calls for crude to rise to $80 by 2020 as output slides to rebalance supply and demand dynamics.   As a result of the perkiness in oil, the loonie is slightly stronger against its dollar counterpart to the south, though Wholesale Trade data for the month of July is due to hit the wires in about an hour.   Expectations are for a 0.8% m/o/m gain from June, though the strong reading on Manufacturing Sales released last week for the same month could foreshadow an upside surprise to the median analyst forecast.   Also on the docket, Poloz is speaking this afternoon in Calgary on next year’s economic outlook, so loonie traders will be intently focused on how the BoC could potential respond in the coming months given the Fed’s decision to leave rates on hold.

Further reading:

CAD: Don’t Fall Into The Gap; GBP: BoE Eyeing Fed – CIBC

USDJPY Still inside the Triangle, USDCHF is Ready To Move Higher: Elliott Wave Analysis

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.