What we Learned this Quarter

The quarter ended with more data suggesting the Fed won't hike this year. On the day, the commodity currencies led the way while the euro lagged. Up next, the Q3 Tankan survey kicks off a huge month for Japan. The chart below shows the fading US yield differential over six major currencies since the start of the year. Interestingly, the percentage change in the US 10-year yield over that of Japan, Eurozone and UK is now negative YTD.

Flow-driven trades were the story on Wednesday as the quarter wound down. Fund rebalancing helped boost the S&P 500 to a nearly 2% gain but the index was still down 6.4% in the past three months in the worst quarter since 2011.

Best FX Performers

When we evaluate the quarter, the Fed was the most-talked-about event but the impact proved to have been overstated as the quarter progressed. The euro was the second-best performing currency this quarter, behind only the yen, narrowly edging over the US dollar.

The big drivers are China and emerging markets. The Brazilian real fell by more than 20% in the quarter and worries about China led to wide stock market losses across the board. In turn, that sparked capital repatriation into USD and JPY.

One spot we're watching closely now is the pound. GDP numbers were a touch soft but the current account improved. In any case, cable has fallen for nine straight days but has nearby support at the May low of 1.5089.

Euro outperformance was another theme early in the quarter but it may come under fresh threat from soft inflation data. The ECB can afford to wait a few months and hope economic data improves but late in the year or early in 2016, they will be put under pressure to act.

But the central banks most in play at the moment are the RBA and BOJ. The IMF released a report warning about the potential for a hard landing in Aussie housing Wednesday and said Stevens has more room to cut if needed.

More from Japan?

JPMorgan was out with a report calling for the BOJ to unleash a new round of stimulus. The Japanese PM was talking about Abenomics 2.0 yesterday and the October 30 decision promises to be a big one. A major factor will be industrial sentiment and the best gauge comes today at 2350 GMT when the Q3 Tankan is released. The large manufacturer sentiment index is expected to slip to 13 from 15 while small manufacturing is forecast at -2 from zero. Ashraf has detailed the various paths of stimulus likely to be adopted by the BoJ as he makes the case for another trade in the latest Premium Insights.