FX Thoughts : FOMC Halloween Edition

An action packed weekend with the Eurozone banks audit all sorted with minimal fuss after a year of suspense and Brazil elections done and over with.

It was overall, a boring week with most focus on equity markets bouncing back up with buying opportunities presenting themselves at each NY city Ebola scare. No one caring that the cases in Africa have topped 10,000 and no one overly concerned about with shootings or trespasses at the White House and House of Commons.

In other words, volatility died last week as the VIX saw its sharpest drop since 2009 and the Fear Index is less fearful whilst still at levels of Extreme Fear as compared to the heightened level of Extreme Greed last year.

Average trading ranges for currencies have come off in the absence of central banks speaking and the USD DXY index is holding at its 4 year high against the 2 year low in oil prices.

DXY VS WTI

The oil price drop has been lauded as a big bonus for EM countries dependent on imported oil and the strategists have all come out to revise their inflation expectations lower.

em inflation expectationsAnd it has been bullish for EM Asia, at least, because we are seeing meaningful inflows into EM Asia again, at the expense of Latam, Europe and gang.

A Citi report has it that real money investors are still pouring into EM Asia and that should be quite obvious if we read all those reports glowing with optimism on the newly elected governments of India and Indonesia.

The big difference, they highlighted, has been that the funding against the EM Asian longs is now against the EUR instead of the USD and the trend is looking to continue after this week’s FOMC that falls on the eve of Halloween night (31 Oct 2 am Singapore time).

Yes, I know there is a big bumper of economic data and we also have the BoJ on Friday but no one affects the markets more than the Fed these days.

Just take a look at the EUR weekly chart which is more affected by the Fed than their own central bank as I have observed before. https://tradehaven.net/market/fx/what-happened-last-night-who-is-telling-who-what-to-do/

eur fomc

The markets will work themselves into a fever on this one which marks the end of the Fed taper.

Much as the continuation of QE would be seen as a helpful gesture for the stock and bond markets, I believe it would be highly dysfunctional if we have the 3 major central banks on easing mode, all at once, as it would tantamount to a global currency war with all countries devaluing at once to make their numbers look better.

Thus, Morgan Stanley and JP Morgan are right. The truth is that nothing will change and the Fed will try not to upset the precarious balance right now.

In that case, we can go back to the USD trade vs the majors which is what I will be doing this week with the exception of the carry currencies like the AUD and NZD which are really too expensive to sell.

The market is most short the EUR since Jul 2010 and everyone wishes it lower and thus 1.26 should be an easy enough target.

EUR VS CFTC

 

The BoJ is most likely to disappoint just like Abe’s popularity is slipping fast with the mass resignations in his cabinet. http://www.reuters.com/article/2014/10/26/us-japan-politics-idUSKCN0IF02520141026?feedType=RSS&feedName=topNews&utm_source=twitter

Japanese economic data has been going strong as the Citi Economic Surprise Index shows which means BoJ can afford to wait and the markets are not yearning as much for the USDJPY to 110 than the EURUSD to 1.23.

Given its all about positioning, I will just look for opportune levels to sell the EURJPY.

The rest of the currencies will just get dragged along and I doubt we will see Gold and Silver move in a big way as with Oil.

I still like the NOK which has been beaten down to pulp on the Oil run down and a good time to buy after Norges Bank held interest rates unchanged last week. We are talking about the richest central bank in the world here. I think we can get back down to 6.52 in the next couple of weeks.

nok

The world has almost settled that we are going down the path of the “new mediocre”, slow growth and low returns, with the US leading global growth for the first time in 6 years.

That makes economic data and the Fed mighty important for us in this heavy laden week of news flow that will be a bag of Tricks or Treats.

Leaving you with a summary of the more important news and events (Singapore time) for this week, for those sleepless nights.

EVENT 31 OCT