Dollar Mixed Ahead of FOMC Decision

Dollar Mixed Ahead of FOMC Decision

  • No one expects the Federal Reserve to change policy today
  • The Swedish Riksbank kept the benchmark rate unchanged at -0.35% and raised the quantitative easing program by SEK 65 bln
  • Japan reported weak September retail sales; Australia reported lower than expected Q3 CPI
  • The Reserve Bank of New Zealand decision will come out at 4 PM EST today

Price action:  The dollar is mixed against the majors ahead of the FOMC decision.  The Aussie is the worst performer after lower than expected Q3 CPI was reported overnight, and dragged the Kiwi lower as well ahead of the RBNZ meeting today.  The Swiss franc and the Swedish krona are outperforming, despite the Riksbank increasing its QE program whilst leaving rates steady at -0.35%.  The euro is trading flat near $1.1050, while sterling is trading flat near $1.53.  Dollar/yen is unchanged at around 120.50.  EM currencies are mostly firmer.  IDR, RUB, and ZAR are outperforming while CNY, MYR, and PHP are underperforming.  MSCI Asia Pacific fell 0.4%, with the Nikkei up 0.7%.  China markets were lower, with the Shanghai Composite down 1.7% and the Shenzen Composite down 2.2%.  The Dow Jones Euro Stoxx 600 is up 0.5% near midday, while S&P futures are pointing to a flat open.  The 10-year UST yield is flat near 2.04%, while European bond markets are mixed.  Commodity prices are mixed, with oil up modestly.

  • No one expects the Federal Reserve to change policy today.  Those who expect a move this year are focused on the mid-December meeting.  The overall assessment of the US economy is unlikely to have changed significantly since the September meeting.  It will be interesting to see how the Fed characterizes the labor market after two soft nonfarm payroll reports.  However, other readings on the labor market do not confirm the deterioration.  Specifically, the ADP estimate showed no marked slowdown in employment and the weekly initial jobless claims (four-week average) is at new cyclical lows.
  • The Fed’s communication has shifted expectations from date-dependent to data-dependent.  To rule out a December hike, which some observers anticipate, would seek to undo some of that necessary work.  In addition, the Fed’s leadership has continued to suggest that, provided there are no new negative surprises and the economy evolves as officials expect, it still anticipates a hike before the end of the year.  As there are two meetings left including today’s meeting, it puts the onus on the December meeting.
  • With no press conference afterwards, the FOMC statement takes on greater importance and will scoured for clues and changes.  We expect Yellen and company to keep the door open for a December move, but without committing to it.  The language should thus be suitably vague.  Yet we warn that markets may be overly complacent about today’s FOMC being a non-event.
  • The Swedish Riksbank kept the benchmark rate unchanged at -0.35% and raised the quantitative easing program by SEK65 bln. This is the fourth increase in the program since February.  Only a small minority of those surveyed by Bloomberg expected a 10 bp cut.  The statement added that “An initial raise in the rate will be deferred by approximately six months compared with the previous assessment.”  The Swedish krona initially weakened on the announcement but is now on net stronger, with the dollar falling to SEK8.4630.
  • Norway reported weak September retail sales, falling -0.8% m/m vs. expectations for an increase of 0.3%.  Also of note, Norway’s August unemployment rate unexpectedly ticked higher to 4.6%.  The Norges Bank’s last move was a surprise 25 bp cut to 0.75%, and next meets on November 5.  Most see no move then, but some are looking for a possible December move.  That is still a ways off, and we think it will really depend on how the data come in.  If the data continues to come in soft, that meeting becomes live.
  • Also on the data front, Germany reported GfK consumer confidence at 9.4 in November, right at expectations.  Elsewhere, Japan reported September retail sales overnight at -0.2% y/y vs. expectations for an increase of 0.4%.  While Japan data has been very disappointing recently, officials there seem to be in no hurry for the BOJ to ease again.  Some believe measures will be seen at this Friday’s meeting, but we suspect the central bank will hold off for now.  If so, disappointment could see USD/JPY move below 120.
  • Australia reported Q3 CPI overnight.  Headline inflation came in at 1.5% y/y vs. 1.7% consensus and 1.5% in Q2.  The RBA’s preferred trimmed mean measure came in at 2.1% y/y vs. 2.4% consensus and 2.2% in Q2.  The RBA next meets November 3, and expectations of a move then will be fanned by the data.  Of the 29 analysts polled by Bloomberg, 20 see steady rates at 2% and 9 see a 25 bp cut to 1.75%.  We think a cut then is unlikely, but cannot rule out further easing later if the data continue to come in soft.
  • During the North American session, the US reports weekly mortgage applications and advance September trade.  Weak August trade data was a big factor behind downgraded Q3 growth forecasts, so today’s data will be another piece of the puzzle.  Yesterday, September US durable goods orders were disappointing, but we think Q3 has already been written off as soft.  Advance Q3 GDP will be reported Thursday, with consensus at 1.5% SAAR vs. 3.9% in Q2.  Q4 outlook will be more important for the Fed, and for that, we will have to wait until next Friday when October jobs data will be released.  Consensus NFP is currently 179k vs. 142k in September.
  • The Reserve Bank of New Zealand decision will come out at 4 PM EST today.  The Bloomberg consensus looks for the central bank to stand pat at 2.75%, though a small number of banks, including two based in Australia and New Zealand, are among those looking for a rate cut.  The nearly 8% appreciation of the New Zealand dollar over the last six weeks increases the risk of a surprise move.
  • Korea reported firmer September discount and department store sales, up 7% y/y and 2.8% y/y, respectively.  It then reports September IP Friday, and is expected to rise 0.4% y/y vs. 0.3% in August.  Over the weekend, Korea reports October trade data.  Exports are seen at -14.5% y/y, and imports at -13.5% y/y.  We think downside risks will move the BOK to a more dovish stance in 2016, and the next rate cut becomes even more likely if the JPY/KRW cross continues to move lower.  After poking above 10 in August and September, that key cross is moving back towards 9.  It broke below its 200-day MA near 9.32 last Friday but has since recovered to near 9.40.