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Risk FX Hit Again as Global Stocks Enter Bear Market Territory

Risk FX Hit Again as Global Stocks Enter Bear Market Territory

2016-01-20 12:45:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- AUD/USD, NZD/USD pressing breakout levels lower.

- USD/CAD volatility nearly guaranteed thanks to market sentiment.

- Follow retail crowd sentiment with live SSI charts.

We're not yet three weeks into the New Year, and already, warning bells are going off about the global economy. The latest siren: the global equity market rout has taken on a new identity with losses of -20% or more piling up over the past 52-weeks. The German DAX 30, the UK FTSE 100, and the Japanese Nikkei 225 - among others - have all entered bear market territory (the US S&P 500 is only off about -12% from last year's highs, so not there yet).

One of the most important things to watch going forward will be the evolution of Fed commentary in context of recent global financial markets' collective anxiety. With the US labor market holding firm and nascent signs of incoming inflation data turning higher (the next US CPI report is today at 13:30 GMT), the Fed has looked headstrong in its effort to normalize policy.

As the Fed has beaten the drum of raising rates around four times this year (bringing the benchmark interest rate to 1.50%), market participants have become increasingly pessimistic on that scenario actually playing out. Indeed, it seems traders are now looking for the Fed to pull back its rate expectations, with only one rate cut priced in (for September) per the Fed funds futures contract:

Table 2: Probability of Rate Hikes across Upcoming Fed Meetings

Fed rate hike probabilities - January 2016

This represents a major problem for the US Dollar, although not necessarily in the short-term as the greenback enjoys safe haven status during the latest waves of negativity. However, there will be a time in the future when the market and the Fed need to come to terms over their disagreement; it looks like the Fed will be the first to move. For now, this lack of policy clarity is doing anything but helping market sentiment.

Aside from the bevy of US economic data coming up shortly, the first of two central bank events on the calendar this week is due up at 15:00 GMT, when the Bank of Canada meets for the first time this year. It looks like the meeting and policy statement could spur a big move in the Canadian Dollar - no matter what the central bank does.

Ahead of the meeting, OIS are discounting a 57% chance of a 25-bps cut, while the consensus forecast by Bloomberg News shows that economists are expecting rates to remain on hold. Half the market sees a cut while the other half sees inaction; collectively, a large portion of market participants are wrong on the Bank of Canada decision, even before it occurs, which means there will likely be a large move on the decision, one way or the other as positioning adjustments ensue.

See the above video for technical considerations in the USDOLLAR Index, EUR/USD, AUD/USD, USD/JPY, NZD/USD, USD/CAD, and GBP/JPY.

Read more: Euro Grind Continues as Prospect for ECB Action Slowly Increases

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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