The impact from Paris terror attacks to the global financial markets was rather short lived. Stocks staged strong rebound after initial dip last week. Meanwhile, policy divergence was back to be the main theme in the currency markets. Dollar managed to record broad based weekly gain, except versus Aussie, as FOMC minutes added to the case for December Fed rate hike. Meanwhile, Euro and Swiss Franc were the weakest and ECB officials' rhetorics affirmed the case for additional stimulus in December ECB meeting. RBA minutes provided little news to the market but that was enough to support Aussie' rebound. BoJ left policies unchanged as widely expected and triggered little reaction. The upcoming week is rather busy even though US will be on bank holiday on Thursday. But traders will likely look beyond this week's event and instead, await for the key central bank meetings next month.
The statement for the October FOMC meeting had surprised the market with a hawkish note, heightening speculations of a rate hike in December. However, a look in the more detailed minutes suggested that policymakers remained divided on a number of issues, in particular inflation and employment. The minutes unveiled that 'several participants' judged that it would be prudent to consider additional easing if deterioration of the economic outlook undermines improvements in the employment market and impedes inflation from returning to the 2% target. On the monetary policy outlook, it is highly likely that a rate hike would come in December. After that, the members largely agreed that 'it would probably be appropriate to remove policy accommodation gradually". Indeed, speeches from several Fed members were consistent with the tone of a December rate hike. For instance, Atlanta Fed's Dennis Lockhart noted that he's 'comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions... .Given my reading of current conditions and my outlook views, I believe it will soon be appropriate to begin a new policy phase". New York Fed's William Dudley noted that 'If we begin to raise interest rates, that's a good thing... That's not a bad thing', whilst Cleveland Fed's Loretta Mester affirmed that economy can handle a 25 bps rate hike. More in FOMC Minutes Echoed December Liftoff, Unveiled Members' Divisions.
ECB's minutes for the October meeting affirmed that further easing appeared likely. In the account for the monetary policy meeting (the minutes), ECB unveiled concerns over the insufficiency of current accumulative measures, due to a number of external factors. As suggested in the minutes, "while the ECB's asset purchase programs and lending operations were working as intended in expanding liquidity, supporting favorable financing conditions and ultimately reaching output and prices, there had been a number of countervailing developments in external conditions. These included persistently low oil prices, weaknesses in emerging economies and the postponement of the expected adjustment in policy rates in the United States". These issues have "raised the possibility that the ECB's measures... might not be gaining sufficient traction... to achieve their ultimate objective in terms of inflation rates". Policymakers stressed that the recovery in the Eurozone remained slow and deflation remained relevant. Against this background, "the view was put forward that a case could be made for considering reinforcing the ECB's accommodative monetary policy stance already at the current meeting and, in any case, to act sooner rather than later". Yet, the ECB indicated that this "did not necessarily speak in favor of additional measures at the current juncture". In such case, policymakers believed it is necessary to accelerate "communication and underscore the Governing Council's determination and readiness to act as soon as warranted by new information and a new assessment, with the December Eurosystem staff projections allowing for an in-depth reflection on the monetary policy stance".
BoJ left monetary policies unchanged as widely expected. Interest rate was held near zero while the annual target of monetary base expansion was maintained at JPY 80T. BoJ noted in the statement that inflation expectations appear to be rising on the whole from a somewhat longer-term perspective," even though "some indicators have shown relatively weak developments." Meanwhile, BoJ governor Haruhiko Kuroda noted that price expectations are rising over the longer term. Economists are divided on the view of whether BoJ would expand stimulus. Some expected weak inflation the the risk of extended recession could force BoJ to ease further next year. However, there were also talks that BoJ would continue to keep powder dry as long as USD/JPY stays above 120.
RBA minutes for the November meeting unveiled that signs of improvement in economic activity in recent months indicated that 'leaving the cash rate unchanged at this meeting was appropriate'. However, they remained concerned about the weakness in inflation and noted that 'the inflation outlook may afford some scope for further easing of monetary policy, should that be appropriate to lend support to demand'. Policymakers also suggested that the slowdown in emerging market came in faster than expected. Yet, the moderation would likely continue for some time. The RBA suggested that slowdown in China and other emerging economies would 'likely to be more persistent than expected'. Growth in Australia's trading partners would be 'slightly below its decade average over the period ahead'. We retain the view that the RBA would keep its cash rate unchanged at 2% for the rest of the year and likely for the first half of 2016. More in RBA Minutes Suggested Weak Inflation Might Make The Case For Further Easin.
The intraweek dip in dollar index raised some concerns over the bullish outlook. But the pull back was held well above 98.43 short term support and the index recovered. Thus near term bullish outlook is maintained. Nonetheless, we'd like to point out again that one interpretation is that the consolidation pattern from March high of 100.39 has completed and current rise is resuming the larger up trend. But that is far from being certain. Break of 98.43 will argue that the consolidation from 100.39 would be starting another falling leg. And in that case, the dollar index would dip back to 55 days EMA (now at 97.16) and below.
Regarding trading strategy, we'd holding on to EUR/USD short position. Downside momentum wasn't convincing with bullish convergence condition in 4 hours MACD. Nonetheless, technically, near term outlook will stay bearish as long as 1.0829 minor resistance holds. Fundamentally, diverging monetary policy path will continue to weigh on the pair. Hence, we'd expect further decline to retest 1.0416 low and there is chance for a break there to extend the larger down trend. We'll stay short in EUR/USD with a stop at 1.0850.