Intraday Market Thoughts Archives

Traders are already grappling with the prospect of an ECB rate cut in the week ahead. The euro plunged the most in 4 months Thursday on a weak inflation report. The Canadian dollar was the best performer on the day after a dismal month for the loonie; the market will remain focused on the commodity bloc with the official Chinese PMI up next. 

The European economy is in the midst of a modest recovery but inflation was at just 0.7% in the past year, well below the 1.1% expected. Will the ECB insist that better growth will spark inflation or be forced to cut rates? The problem is that rates are near the zero bound and lowering the main refi rate would narrow the corridor to the deposit rate which is at zero percent. That could mean negative deposit rates. Either option carries risks to the financial system but economists were lining up Thursday to predict a cut anyway. Ashraf covered in today's edition of the Premium Insights his take on the internals of possible rate cut and the dynamics of the euro's reaction to such action.

Only two days ago the ECB's Nowotny said a cut wasn't realistic. Could the story change that quickly? Euro traders certainly believe so, or at least they see the possibility. EUR/USD plunged to 1.3580 in a one-way move.The momentum is certainly lower but the market has nearly a week to lose faith in the rate cut narrative.

Up next, at 2100 ET, 1:00 GMT,  China releases the official manufacturing PMI. It's expected to inch to 51.2 from 51.1. Forty-five minutes later HSBC releases its final PMI and it's expected to be revised to 50.7 from the initial disappointing reading at 50.2.

The Federal Reserve left its statement virtually unchanged, defying forecasts it would tip its hand toward a later taper. The New Zealand dollar later jumped as the RBNZ pointed to rate hikes in 2014. The yen was the laggard on the day but the Bank of Japan decision could change all that. 

The FOMC decision was a headscratcher. As one analyst put it: It was as if the Fed wanted to send a message by changing as little about the statement as possible. The message was almost the same as it was six weeks ago before the shutdown and the recent blip in economic data. Does it mean the Fed is itching to taper? Or maybe it means nothing at all.

The market certainly expected some stronger nod toward the shutdown or softer economic growth. That was enough to lead to a broad US dollar rally. The danger may be trying to read too much into the statement. On Friday, Bullard, Kocherlakota and Lacker deliver speeches and may offer some much-needed interpretation.

The dollar made a solid 60-70 pip jump across the board but there has been no follow through as traders digest the news. One reason is soft economic data; the Oct ADP jobs report rose 130K compared to 150K expected along with downward revisions to September. US Sept core inflation was also a touch soft.

One exception was NZD as it climbed from as low as 0.8192 to 0.8266 after the RBNZ decision. Rates were held at 2.50% but Wheeler reiterated rate hikes would be needed in 2014. He tempered that by saying the strong NZD could give him reasons to wait longer because it depresses import prices.

Traders in Asia will have plenty to digest, including the rebound in Asian stocks yesterday.  Markit publishes its Japanese manufacturing survey at 2315 GMT but the trading focus will be on the BOJ at about 0400 GMT.

It's likely too early for the Bank of Japan to abandon its current path and there is chatter they will upgrade 2014 growth forecasts. Watch for signs of disappointment in slow inflation, which would send USD/JPY higher.

Today's FOMC announcement to keep total asset purchases unchanged was no surprise, but the fact that the Fed sees improvement in the economy despite “fiscal retrenchment” has somewhat boosted the US dollar. Here are the main red-line comparisons from the Sep 18 decision. Full analysis

The ECB's Nowotny said there won't be a rate cut from the ECB, sending the euro sharply higher and setting off a round of volatility. The US dollar was the top performer on the day while the Australian dollar lagged. Up later is data on home sales from Australia and industrial production from Japan.  

Nowotny, in an MNI exclusive, said there is no realistic prospect of a cut in the main refi rate or the deposit rate. The euro quickly rallied to 1.3813 from 1.3765 on the comment – just shy of a two-year high. The strength didn't last and the euro reversed all the way to 1.3737.

Part of the reason for the drop was that Nowotny also strongly hinted at an LTRO early next year but it also spoke to the limited appetite to buy the euro at these levels, especially ahead of the Fed decision tomorrow.

Other economic news in US trading was mixed. Overall retail sales for September slightly trailed estimates but after stripping out volatile items, sales were slightly stronger than expected. The picture might dim in October if the consumer confidence declines lead to less spending. Confidence fell to the lowest since April at 71.2 compared to 75.0 expected. Housing data pushed aside some of the worries from yesterday's pending home sales report as the Case-Shiller home price index rose 12.8% y/y vs 12.5% expected.

The weakness in the Australian dollar and pound were indicative of traders paring back recent bets against the dollar. Those have been two of the best performing trades against USD this month and jawboning from Stevens and UK mortgage data weren't great reasons for such steep declines.

The market might quiet ahead of the Fed but at 2350 GMT Japan releases the preliminary September industrial production report. It's expected to show a 5.5% y/y gain. Ten minutes later the focus shifts to Australia for HIA new home sales.

The RBA faces the quandary of an overheating housing market, rock bottom interest rates but a strengthening currency.  Yet, the central bank cannot cut rates any further due to fear of endangering a re-emerging housing bubble, while simultaneously facing a rising currency in a tepid economy. Full charts & analysis

A surprise drop in US pending home sales demonstrated the difficulty the Fed faces as it ponders when to scale back bond purchases. The kiwi was the top performer and the Swiss franc lagged but market moves were small. Japan releases employment and retail sales data later.

Pending home sales fell 5.6% compared to a flat reading expected in the worst report in three years. The numbers were from September, before the shutdown soured moods even worse. Industrial production rose 0.6% vs 0.4% expected but the effect was mitigated by downward revisions.

Overall, the market was in a struggle for direction. The euro tried the top and bottom of the recent range but was left stranded. EUR/USD has been in a 90 pip range for the past four sessions.

USD/JPY was even tighter as it languished in a 20 pip range for most of the day on Monday. Soggy weather in London likely kept traders away from their desks. The good news is that periods of near-nil trading are often broken by decisive moves.

Those moves could come Tuesday on the US retail sales report or a day later on the Fed decision. There is no realistic chance of a change in Fed policy but the official line from the Fed remains a base case for tapering before year-end. How they tweak that language could send a strong signal.

In the hours ahead, the focus will be on Japan. Dovish comments from the BOJ gave USD/JPY a small lift Monday and economic data could sway the pair further. Retail sales are expected to rise 0.% in September and the jobless rate is expected to slip to 4.0% from 4.1%.

Ashraf Laidi lifts City Index to the #1 rank of FX Week's currency poll. Full detail & tables

USD / JPY is higher to start the week as Japan sabre rattles with China over the disputed islands. China is climbing the broader agenda as well with leaders promising unprecedented reforms. Trading in the UK will be soggy with hurricane force winds hitting the island.  

Japan scrambled jets numerous times on the weekend after Chinese planes entered international waters near disputed territory.

Also in China , Yu Zhengsheng‎, a member of the 7 person Politburo that decides government policy warned that major changes will be announced after meetings next month.‎

"The depth and strength of the reforms will be unprecedented and will promote profound changes in every area of the economy and society", Yu said.

Officials will undoubtedly try to limit shocks but the Chinese administration has been tightening credit and liquidity so financial reforms could be severe. Policies geared at liberalizing yuan trading could also be brought forward. Expect that it will be less than 10 years before FX traders will have CNY on their tickers.

In the nearer term the market will watch the UK for potential flooding and damage as the strongest storm to hit England in 5 years bears down. Damage will probably be light but trading desks will be on skeleton staffs so that could limit liquidity to start the week.

A story that's sure to strain transatlantic relations is a report that the NSA has tapped Merkel's phone since 2002 and that Obama knew about it since at least 2010.