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Currency Markets Gyrate Amid Pre-Positioning for Fed Rate Hike

Currency Markets Gyrate Amid Pre-Positioning for Fed Rate Hike

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Currency Markets Correct Friday’s Price Action on Pre-FOMC Positioning
  • US Dollar May Yield Disparate Response vs. Majors on Fed Rates “Liftoff”
  • Gauge Trends and Spot Reversals in the Top Currencies with DailyFX SSI

Currency markets are in retracement mode to start the trading week. The Swiss Franc, Euro, British Pound and Japanese Yen are trading lower having outperformed on Friday while the Australian and Canadian Dollars are in recovery mode having been the weakest over the same period. Risk sentiment trends have done an about-face as well: S&P 500 futures are trading sharply higher after the benchmark stock index suffered the worst drop in over two months to close last week.

Price action appears to reflect pre-positioning as markets swing back toward neutral ahead of this week’s much-anticipated FOMC monetary policy announcement. Fed Funds futures suggest markets widely expect Fed Chair Yellen and company to deliver the first post-QE interest rate hike, nudging the target range for the benchmark lending rate higher by 25 basis points into the 0.25-0.50 percent territory. That may prove negative for sentiment.

The Fed’s aggressive easing over the past seven years slashed returns on safer assets and encouraged a reach for yield outward along the risk spectrum. The growing proximity of stimulus withdrawal since mid-2014 might have been expected to begin reversing this dynamic. Various false starts failed gain traction however even as the US Dollar embarked on a long-lasting rally to reflect the looming policy shift.

This warns that a period of portfolio readjustment is still pending and may be triggered in earnest once the rate hike is finally a reality. The ensuing risk aversion may bode ill for the sentiment-linked Australian and New Zealand Dollars, sending them downward alongside stock prices, while boosting funding currencies like the Euro and the Japanese Yen. Within that context, Friday’s moves may have amounted to an early preview of the markets’ disposition, while today’s retracement marks an unwillingness to fully pre-commit before speculation turns into fact.

Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

21:30

NZD

Performance Services Index (NOV)

59.8

-

56.5

23:50

JPY

Tankan Large Mfg Index (4Q)

12

11

12

23:50

JPY

Tankan Large Mfg Outlook (4Q)

7

11

10

23:50

JPY

Tankan Large Non-Mfg Index (4Q)

25

23

25

23:50

JPY

Tankan Large Non-Mfg Outlook (4Q)

18

22

19

23:50

JPY

Tankan Large All Industry Capex (4Q)

10.8%

10.2%

10.9%

23:50

JPY

Tankan Small Mfg Index (4Q)

0

-1

0

23:50

JPY

Tankan Small Mfg Outlook (4Q)

-4

-2

-2

23:50

JPY

Tankan Small Non-Mfg Index (4Q)

5

2

3

23:50

JPY

Tankan Small Non-Mfg Outlook (4Q)

0

0

1

00:01

GBP

Rightmove House Prices (MoM) (DEC)

-1.1%

-

-1.3%

00:01

GBP

Rightmove House Prices (YoY) (DEC)

7.4%

-

6.2%

00:30

AUD

Credit Card Purchases (A$) (OCT)

24.8B

-

24.8B

00:30

AUD

Credit Card Balances (A$) (OCT)

50.6B

-

50.8B

04:00

JPY

Tokyo Condominium Sales (YoY) (NOV)

4.8%

-

-6.5%

04:30

JPY

Industrial Production (MoM) (OCT F)

1.4%

-

1.4%

04:30

JPY

Industrial Production (YoY) (OCT F)

-1.4%

-

-1.4%

04:30

JPY

Capacity Utilization (MoM) (OCT)

1.3%

-

1.5%

04:30

JPY

Tertiary Industry Index (MoM) (OCT)

0.9%

0.5%

-0.4%

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

08:00

CHF

Total Sight Deposits (DEC 11)

-

467.5B

Low

08:00

CHF

Domestic Sight Deposits (DEC 11)

-

397.1B

Low

10:00

EUR

Eurozone Industrial Production (MoM) (OCT)

0.3%

-0.3%

Medium

10:00

EUR

Eurozone Industrial Production (YoY) (OCT)

1.4%

1.7%

Medium

10:00

EUR

ECB's Nowotny Briefs IMF on Article 4 Mission

-

-

Low

11:00

EUR

ECB’s President Draghi Speaks in Bologna, Italy

-

-

Medium

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EURUSD

1.0773

1.0877

1.0932

1.0981

1.1036

1.1085

1.1189

GBPUSD

1.4965

1.5079

1.5146

1.5193

1.5260

1.5307

1.5421

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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