Federal Reserve Chairwoman Yellen’s speech yesterday to university students and the assembled media has got markets a little confused again. Coming just over a week since the Federal Reserve’s September meeting, markets have been rather surprised by what was missing from the speech more than what was in it.
Throughout her speech Yellen did not mention China or emerging markets once, having seen them dominate the comments made at last Thursday’s policy meeting and the subsequent press conference. While dollar has run higher on the headlines of ‘Yellen calls for 2015 rate increase” or some such, the overarching theme within her missives in my opinon was that the domestic economy remains weak and that any hike that may be forthcoming – and December is looking like a lock now – will be it for a while.
Divergence of thoughts
Dollar has run stronger in the aftermath as is natural from that speech, although interest-rate predictions markets seem to agree that the overall speech can be viewed dovishly – markets had seen a 49.2% probability of a rate hike at the December meeting before Yellen spoke with the number now falling to 47.0%.
A stronger dollar is not good for risky and emerging market assets and yesterday’s trade saw some of their number get hit very hard. Fresh record lows were seen yesterday for the Brazilian real, Turkish lira, South African rand and Mexican peso against the dollar, with the Malaysian ringgit enduring its worst weekly performance since 1998. There is little to suggest that we have seen a bottom quite yet.
Euro winning its battles
Euro managed to keep pressure on sterling yesterday despite a poor ifo response from German industry. As we highlighted yesterday, the main reason for the single currency’s outperformance is the risk-off swings that we have seen in the past 24 hours. Commodity AUD, NZD, CAD and emerging (MXN, IDR, RUB) currencies are getting smacked alongside regional equities. EUR is a funding currency for these trades and alongside its strong current account surplus is a great haven from these issues and hence its run higher. Similar positive moves had been seen in the JPY and CHF.
Time to change BoJ
Japan’s inflation issues continued overnight as CPI slipped into deflation for the first time since August 2013. For a central bank that has been so vocal on its belief that it will hit its inflation target within the next year this figure must stick in the throat a bit. It has also been vocal on keeping policy as it is. Traders are weakening the yen this morning on the belief that the Bank of Japan will end up reversing its stance on this before too long.
Today’s markets will be dominated by data from the States with the final reading of Q2 GDP from the US due this afternoon alongside the core measurement of PCE inflation – the Fed’s preferred measure. Strength here will see that dollar remain out front as we head into the close.