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Chinese equities in Shanghai and Hong Kong continued a robust rally while overall the mood across the rest of the Asia and the world has been relatively passive as the market awaits today’s policy announcement from the Federal Reserve. Despite a decline in property price data which serves as another example of fundamental weakness in the Chinese economy, both equity markets and the renminbi have appreciated as traders have interpreted this as a ‘bad news is good news’ event signalling that Beijing is now more likely engage in further rounds of stimulus in order to prop up the ailing economy.   Despite the ebullience in China, commodity prices are still taking a knock which has both the kiwi and aussie dollar on a decidedly weaker footing, trading in the low 0.73 and 0.76 levels respectively versus the greenback as activity shifts to the European market.

Despite prior strong performance, the employment picture in the United Kingdom has knocked the wind out of the sterling, with information coming out today signalling that the most recent unemployment and wage growth figures in the British Isles have both missed expectations. This along with comments from the Bank of England today underlining a potential future divergence in central bank policy between the BoE and its continental counterpart has the sterling sharply weaker against the euro, yen and the USD.   While BoE head, Mark Carney, continues to warn that the BoE could begin to raise rates sooner than investors expect, market participants have chosen to focus on the near-miss in employment, pushing the sterling down to the high 1.46 level versus the greenback, the mid 177 level versus the yen and the low 0.72 level versus the euro.

As in the rest of the world outside of China, pre-market trading in North American markets is largely restrained as traders appear reluctant to take any large positions prior to the Fed announcement this afternoon.   S&P futures are slightly positive as the dollar index eases off last week’s 12 year highs despite a recent surge to the mid 1.28 level versus the loonie as this morning Canada posted the largest monthly decline in wholesale sales since the depth of the financial crisis in January 2009. With the exception of the loonie, price action in the USD against its crosses has been largely subdued in anticipation of today’s announcement from the Federal Reserve.

As for the cause of today’s wait and see market, this afternoon marks the end of two days of high stakes deliberations at the Federal Reserve at the conclusion of which it is expected that central bank policy members will open the door for the first interest rate rise seen in the United States in nearly a decade.   Most analysts are anticipating that the fed will drop its statement that it can be ‘patient’ with respect to raising rates which would pave the way for rate rise in June or September of this year. With the last few months seeing the US dollar on the ascendance on the back of solid economic data and the anticipation of future rate increases, the risk of a significant market reaction today is profound.   Highlighting this risk, the head of the IMF, Christine Lagarde, warned that US rate rises could trigger instability in emerging markets similar to the ‘taper tantrum’ that occurred in 2013. Given that, it would be advisable to reach out to your dealing team to outline solutions that can insulate your organization from any upcoming market volatility.

Further reading:

Canadian wholesale sales plunge 3.1% – USD/CAD reaches new high

FOMC meeting takes center stage