Fed Chair Intrigue
US Yields have been on the rise as has the USD but both still unable to breach any significant near-term level. Most are crediting the move to the increased likelihood of Robert Taylor becoming the Fed Chair and suggesting a more hawkish tilt to the FOMC. Indeed, a rule-based viewpoint from the future sitting Fed Chair does indicate a quicker and higher pace of interest rate normalisation. But Taylor in his admission is no longer a staunch advocate of the “Taylor Rule, which pegs Fed Fund Rate” considerably higher than the current fixing.So it’s unlikely Fed policy, with Taylor at the helm, will swing too far from the currently projected dot plots. More so given the economic uncertainties surrounding inflation and the disconcerting task of unwinding the Feds colossal balance sheet. But of course, it remains to be seen as to just how aggressive he may be and let us not forget its still anyone’s game.
President Trump spoke on the Fed Chair race, confirming he’s down to five candidates (Yellen, Cohn, Powell, Taylor and Warsh in no particular order) and plans to announce a “very short-time.”
Of course, markets have no idea how to interpret that, but Reuters sources made a credible case saying that the decision will be made before Trump visits Asia on November 3. That would allow the Senate to make way for the nomination hearing.
US Treasury Report
The US Treasury published its semiannual FX report. TWD has been removed from the dreaded watch list while CNY, JPY, KRW, EUR and CHF remain on the list. China will be pleased to know the US says that CNY is “moving in the right direction.” Not as approving, INR is a top the manipulation list after “notable” FX purchases.”
The British Pound
The pound climbed slightly after the UK CPI came in on target but a less than emphatic Carney by alluding “BoE rate hike in coming months may be appropriate” triggered a cascade of GBP selling. I suspect the market focused on “may be” and not “rate hike” suggesting that Brexit fall out continues to weigh on BOE sentiment. Also, Silvana Tenreyro, an external member of the Monetary Policy Committee, said the upward pressure on inflation from sterling weakness would start to wane in the coming months. A common viewpoint held by traders as much of the current inflationary pressures is driven by currency weakness.
With the Brexit bluster hanging over Cable like a dark cloud, and growing rate hike debate amongst BOE. The trap door sprung on sterling. In fierce price action, the market quickly moved to price in a one and done rate hike scenario.
The Australian Dollar
Marching to its own beat the RBA minutes bolstered the view that the Australia’s Central Bank won’t necessarily follow others in lifting interest rates. After all, the RBA OCR did not fall as low as other Central banks and remains above both the US Fed and Bank of Canada overnight lending rate. There were few surprises in the minutes, but Thursday's China data dump and Australia jobs numbers could provide some support. Also with the Chinese Communist Congress slated to start today, the antipodeans could get some support from the expected treasure-trove of headlines.
Kiwi traders remain in limbo as they wait for the new government which has been delayed by the NZ First party political wranglings.
The Euro
The ECB has sucked the life out euro by doing their best to make the October meeting a non-event while laying the ground works for a very dovish QE exit. While Draghi’s guidance has been telegraphed, however, if the ECB turns out to be more dovish than expected on 26th, there is a real risk that the EUR could decline sharply.
I the meantime, we should continue to tread water in the broader 1.1700-1.1850 range but its difficult to get too excited about the EUR in either direction these days as currency markets find themselves caught between a dove (ECB) and a wannabe hawk (Fed). The lack of topside momentum in recent weeks has motivated many dealers to reduce exposure, and while the euro remains tentatively bid on dips, there’s very little excitement on the EUR post these days
Japanese Yen
US bond yield is the primary driver, but investors are now positioning for an impressive Abe election result. Given this scenario, and a higher trending dollar the USDJPY could firm heading into the weekend.
Asia FX
Local Asian currencies were not immune from the Taylor Rule effect getting weighted down by the broader USD trending higher. The high yielders INR and IDR saw waves of hedging flow which snaked into other ASEAN peer currencies. But the market has stabilised overnight after CNH buying interest appeared just at the 6.62 level after USDCNH wore the brunt of yesterday USD move with trader reducing exposure ahead of the Chinese Communist Congress
The market remains guardedly optimistic in EM Asian currencies, but over the short term with all the USD uncertainty brewing over the next Fed Chairperson, investors will take a very cautious tack.