Subdued Price Action as Fed Week Kicks Off

After a quiet week where market participants digested the previous weeks’ employment data in the US, along with fresh accommodating monetary policy measures from the ECB, economic and political event risks pushes its way to the forefront of investors’ minds as the calendar heats up again. The conclusion of the FOMC’s two day monetary policy meeting on Wednesday is of significant importance for the investment community and the direction of the big dollar, with expectations the hawkish camp of the FOMC will get to spread its wings a tad more than has been illustrated in the past.  

While the continuing trimming of the Fed’s asset purchases is very much assured, the more important areas of focus will be the FOMC’s updated economic projections, along with Yellen’s subsequent press conference.  There is upside risk for the USD should the Fed’s dot charts becomes more optimistic in terms of the economic recovery and thus brings interest rate expectations forward, along with potentially seeing a change in forward guidance with the hawks hoping to drop the reference to rates remaining low for a “considerable time” after QE ends.  

Though the economic indicators have showed continued improvement of late, acceleration of the labour market has yet to take off, and thus adds some threat Yellen may try to temper any hawkishness in the rate statement during the press conference afterwards.  While we expect continued upward momentum for the USD into the release, we are cautious a good amount of USD strength has been priced into the market leading up to Wednesday’s decision, with the big dollar susceptible to disappointment if dovish troika of Yellen, Dudley, and Fischer dominate communication.

As we get set to kick off the new trading week, S&P futures have managed to make a modest recovery from the overnight lows that transpired in the wake of disappointing August numbers coming out of the Chinese economy.  Industrial output, fixed asset investment, and retail sales all missed expectations and decelerated when compared to the previous month, suggesting a loss in momentum for the Chinese economy after seeing a rebound in Q2.  That challenging part for the investment community is that rhetoric from policy makers has been focused on structural reform as opposed to stimulus to support economic growth, which leaves investors worrisome about global growth should the struggles seen in August be representative of the months to come. 

 That being said, the Chinese government has been engaging in targeted easing throughout the majority of this year when a priority has been deleveraging, so it’s not clear whether this is another diversion tactic from policy makers and further steps will be taken if growth forecasts appear to be in danger.

With the economic docket fairly light this Monday morning, currency markets are seeing continuation from last week’s price action, with the USD the best performing of the majors ahead of the opening bell, putting pressure on both the Pound and Euro.  Despite the pessimistic Chinese numbers, the Loonie has managed to cauterize its bleeding for the time being, with USDCAD taking a reprieve from last week’s rally to grind away in the high-1.10s.  The Loonie’s relative outperformance is also in contrast to the slide in commodities, both WTI and Brent off almost 1% from Friday’s close.  

While it is likely that broader financial markets take their cues for today’s session from the capacity utilization numbers out of the USD due to be released shortly, they will play second fiddle to the central bank announcements and Scottish referendum ballot that are due to come later in the week.