What the TPP Means for FX

Markets opened the new week relatively flat. Japanese wage inflation data and the services PMI are due up later. China remains on holiday. A deal on the Trans-Pacific Partnership is expected to be announced today, we look at what it means as well as at the latest CFTC data.

Early in the week the focus is on Australia with the RBA meeting Oct 6. There is little talk of a rate cut but officials could signal the potential for further easing later in the year. Economic data was mixed with the AiG service sector index falling to 52.3 from 55.6%. That was balanced by TD Securities inflation expectations rising to 1.9% from 1.7%.

AUD/USD is up 5 pips at 0.7049.

A central bank that's more likely to act this month is the BOJ so every Japanese data point will be scrutinized. At 0130 GMT it's the August Japanese labor cash earnings report. It's expected to rise just 0.6% y/y, down from a 0.9% rise the month before and further away from Japan's inflation target. That will be followed 5 minutes later but Japan's services PMI from Nikkei. The prior reading was 53.7. Ashraf's latest take on the next BoJ meeting is in the current USDJPY Premium trade.

What you need to know about the Trans-Pacific Partnership

It's a 12-nation free trade-type deal aimed at diminishing trade barriers. The participating countries are the United States, Chile, Singapore, Australia, Peru, Vietnam, Malaysia, Mexico, Japan, Canada and Brunei. It has been negotiated in secret. If a deal is struck today the text will be released and national parliaments will have a year to ratify the agreement.

The TPP could also further extend the US trade deficit with Japan once the US lifts hefty tariffs on cars and trucks. US winners are likely to be big oil and chemicals seeking to expand investments in Malaysia.

Markets will closely watch details on agriculture, manufacturing, intellectual property and pharmaceuticals. Companies in those industries may react to the details, but currencies could also shift if national industries – like New Zealand dairy – are perceived to be under threat, or in a position to expand.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -88K vs -81K prior JPY -22K vs -24K prior GBP -2K vs +1K prior AUD -49K vs -53K prior CAD -42K vs -38K prior CHF -3K vs -2K prior

Last week, US dollar net longs fell to their lowest in a year but they bounced back slightly this week, mainly on yen and commodity currency selling. With the sharp deterioration in Fed hike hopes, the US dollar remains vulnerable on the downside.