What Will the Fourth Quarter Hold for the FX Market and Commodities?
Trends in the FX and capital markets that were dominant through the first half of 2015 have flagged and started to turn through the second half. Are reversals gaining traction or is this just a fundamental breather?
Anxiety is building for Dollar traders. On the one hand, the Dow Jones FXCM Dollar Index (ticker = USDollar) has moved into a consolidation pattern that is quickly running short on room. On the other, fundamental interest behind risk trends and rate speculation is steadily reinforcing support. Unless fundamentals suddenly deflate, the Greenback – and likely the broader financial system – is facing a decisive break in the near future. The direction this move takes will depend materially on its timing and the motivation for the move.
In the early part of the fourth quarter, Fall trading conditions are historically volatile and volume-laden. Yet, the closer to year-end we march without a move, the more mired in holiday trading conditions we become. As for motivation, the US currency has benefit tremendously from the swell in speculation that it will be the first major central bank to tighten policy and bolster rates. Yet, certainty has steadily deflated and the ‘first-mover’ premium may be priced in. Perhaps a move to safety is the only outlet to sustain a bullish bearing.
Gold prices are set to finish the third quarter in much the same place as they started it. The metal swiftly plunged to the lowest level in over five years in late July but the selloff lost momentum and a recovery ensured, with prices grinding their way back to where they started the second half of the year over the subsequent months. Uncertainty surrounding the outlook for US monetary policy looks to have been the culprit behind seesaw volatility.
When the Federal Reserve opted against a rate hike at its July meeting but struck a hawkish tone in its accompanying commentary, investors seemed convinced that “liftoff” would commence in September. Doubts began to surface in August as risk aversion spilled out across financial markets, but central bank officials put on a brave face to argue that the tumult would not derail their outlook. Then, the rate-setting FOMC committee appeared to get cold feet, delaying the onset of normalization yet again and issuing an ominous statement replete with worries about threats posed by external forces.
Coming into Q3’15, our main theme for EURUSD was heightened volatility: after carving out a range from $1.0519 to $1.1466 in Q2’15, we were anticipating directionless trade with the extremes of the ranges tested. Price did indeed carve out a wide range, trading in the higher end established in the previous quarter: Q3’15 price action varied between $1.0823 and $1.1713. As the seasons change, however, the relative period of stability in EURUSD may be ending, with lower prices coming sooner rather than later.
The biggest factor coming into Q4’15 for the Euro, inarguably, is the evolution of European Central Bank monetary policy. Now that the Federal Reserve is keeping its ZIRP policy in place amid a backdrop of falling energy prices and ongoing disinflation, traders have already shifted their attention to the ECB for their countermove.
Even though USD/JPY remains stuck in a tight range, the pair may resume the long-term bull trend as market participants speculate the Bank of Japan (BoJ) to further expand its asset-purchase program in the fourth-quarter of 2015, while its U.S. counterpart keeps the door open to remove the zero-interest rate policy (ZIRP) later this year.
The softening outlook for global growth accompanied by the ongoing weakness in oil prices may become a growing concern for the BoJ as it undermines the central bank’s scope to achieve its 2% inflation target, and a greater willingness to boost the qualitative/quantitative easing (QQE) program is likely to produce headwinds for the Japanese Yen amid the deviating paths for monetary policy.
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