The market is jockeying for position ahead of tomorrow's FOMC meeting, as every FOMC meeting from here becomes a test of where the Fed stands on announcing a new round of quantitative easing. Is the market expecting too much dovishness?
Election in Sweden
The election in Sweden over the weekend resulted in a setback for the Reinfeldt's Alliance party, which will now have to rule with a minority government, though this is not unusual in Sweden's political history. The SEK took a bit of a beating on the back of the results on the political uncertainty, but the currency quickly recovered and got back on the rally track as risk appetite had recovered sharply from the late US swoon and the SEK at these levels (now that it has unwound much of the longer term undervaluation of the currency brought about by the 2008-09 crisis) will likely trade in correlation with the direction of risk appetite.
The election in Sweden over the weekend resulted in a setback for the Reinfeldt's Alliance party, which will now have to rule with a minority government, though this is not unusual in Sweden's political history. The SEK took a bit of a beating on the back of the results on the political uncertainty, but the currency quickly recovered and got back on the rally track as risk appetite had recovered sharply from the late US swoon and the SEK at these levels (now that it has unwound much of the longer term undervaluation of the currency brought about by the 2008-09 crisis) will likely trade in correlation with the direction of risk appetite.
RBA Hawkish
A bit of hawkish rhetoric from the RBA overnight put the pep back in the Aussie's step as the market tacked on another 10 bps to year-forward rate expectations from the central bank. RBA governor Stevens said that inflation is unlikely to fall further, that the Australian economy is likely to grow above trend in 2011, and most importantly, that the RBA's task ahead will be managing Australia's "fairly robust" upswing. The upswing of which he speaks is indeed robust, but is almost entirely centered on the mining industry, which risks giving Australia a case of Dutch Disease. But for now, copper prices are back to within shouting distance of their post-crisis high, which itself much close to pre-crisis levels than many of the other commodities that were in bubble territory by mid-2008. The interest rate spreads also help justify the market's attempt to take AUDUSD to new post-crisis highs. If broader risk appetite measures break higher as well, the market will quickly begin to talk up the idea of parity in that pair.
A bit of hawkish rhetoric from the RBA overnight put the pep back in the Aussie's step as the market tacked on another 10 bps to year-forward rate expectations from the central bank. RBA governor Stevens said that inflation is unlikely to fall further, that the Australian economy is likely to grow above trend in 2011, and most importantly, that the RBA's task ahead will be managing Australia's "fairly robust" upswing. The upswing of which he speaks is indeed robust, but is almost entirely centered on the mining industry, which risks giving Australia a case of Dutch Disease. But for now, copper prices are back to within shouting distance of their post-crisis high, which itself much close to pre-crisis levels than many of the other commodities that were in bubble territory by mid-2008. The interest rate spreads also help justify the market's attempt to take AUDUSD to new post-crisis highs. If broader risk appetite measures break higher as well, the market will quickly begin to talk up the idea of parity in that pair.
But longer term readers know that we are highly skeptical of the Aussie's prospects going forward. Here's a link to a Bloomberg article that is supportive of that idea as well as it discusses the Australian dollar's overvaluation at these levels.
Looking ahead to the FOMC
All eyes on the FOMC tomorrow and once again, we wonder how much of the current strong risk appetite is bound up in expectations for new easing from the Fed that would supposedly lift the economy's animal spirits. While eventually, strong Fed easing moves often produce a rally (think 2003 after more than two years of easing and think 2009 after 18 months of easing), but the initial phases of easing often don't result in lasting rallies. The Fed began easing for example, in September of 2007 and US equities saw their all time top about a month later before falling almost 60% in the ensuing 18 months.
The question is perhaps whether we should consider this a new easing. Considering the fact that the Fed's easing program stopped over a year ago, perhaps it should be. That is to be kept in mind if risk appetite rallies on a new. The Fed has gone from exit strategy plans just a few months ago, to neutral (by keeping balance sheet stable), and now the expectation is for easing once again. We would be surprised to see the Fed trying to cut a strong profile here ahead of the election and wonder if the market is trying to price too much QE into the market. Judging from USD weakness, the market is clamoring for a weaker USD, but judging from the action in US treasuries, there appears to be more uncertainty.
We always say that we are suspicious of any large move that takes place heading into a key event risk, with the key event risk often providing an important inflection point that puts a stop or at least a pause to the prevailing trend. The weaker USD move ahead of the FOMC certainly qualifies for this kind of setup, so let's see if the market continues to bull right ahead after the meeting or if the Fed is going to trigger a negative adjustment to the market's expectations for asset prices.
Movement ahead of US open
We're getting a fairly strong move in the US dollar ahead of the US equity market open - this is a follow up of the strong dollar move from Friday that was partially rejected early Monday perhaps by the RBA rhetoric and strong equity markets in Europe. The Euro may be weaker because of continued nervousness over Ireland, where spreads are rising rapidly and somewhat independently of the general PIIGS spreads developments in recent days. A rumor developed on Friday of the IMF needing to go in (since rejected) and the Irish FinMin was out talking up Ireland's ability to avoid a Greek situation. Tomorrow, the government plans to issue EUR 1.5 billion in new state debt (why not just issue it directly to the ECB?). EURUSD support at 1.3030/40 looks important for supporting the recent rally from sub-1.2700 levels.
We're getting a fairly strong move in the US dollar ahead of the US equity market open - this is a follow up of the strong dollar move from Friday that was partially rejected early Monday perhaps by the RBA rhetoric and strong equity markets in Europe. The Euro may be weaker because of continued nervousness over Ireland, where spreads are rising rapidly and somewhat independently of the general PIIGS spreads developments in recent days. A rumor developed on Friday of the IMF needing to go in (since rejected) and the Irish FinMin was out talking up Ireland's ability to avoid a Greek situation. Tomorrow, the government plans to issue EUR 1.5 billion in new state debt (why not just issue it directly to the ECB?). EURUSD support at 1.3030/40 looks important for supporting the recent rally from sub-1.2700 levels.
Economic Data Highlights
- New Zealand Aug. Performance of Services Index out at 51.4 vs. 50.4 in Jul.
- UK Sep. Rightmove House Prices out at -1.1% MoM and +2.6% YoY vs. +4.3% YoY in Aug.
- New Zealand Sep. ANZ Consumer Confidence out at 116.4 vs. 116.3 in Aug.
- UK Aug. Mortgage Approvals out at 45k vs. 46k expected and 47k in Jul.
- Canada Jul. International Securities Transactions 5.48B vs. 8.0B expected and 5.39B in Jun.
- Canada Jul. Wholesale Sales out at -0.1% MoM vs. +0.1% expected
Upcoming Economic Calendar Highlights
- US Sep. NAHB Housing Market Index (1400)
- UK BoE's Sentance to Speak (1545)
- Australia Sep. RBA Meeting Minutes (0130)
- New Zealand Aug. Credit Card Spending (0300)
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