Risk assets are navigating calmer waters this morning, as the re-opening of Chinese markets after a four-day holiday saw the PBOC pump extra liquidity (for a net CNY 90bn, similar to the size of interventions on Friday and Saturday) into the banking system. Also contributing to limiting losses in Chinese equities was the news that Evergrande has negotiated an interest payment for its 5.8% 2025 bond due tomorrow. As a consequence, US stock futures are pointing at a positive open, and the FX market saw a dominance of risk-on moves with commodity currencies gaining against safe-havens this morning.
While it still appears that the Evergrande saga holds the keys to any directional move in the market this week, it is hard to attribute any secondary role to the FOMC rate announcement today. The market consensus appears quite clear: the Fed will refrain from sounding too hawkish. This implies no tapering announcement just yet - with any reference to the plans to unwind asset purchases likely to be kept open-ended when it comes to timing - and a reiteration that tightening will not be an immediate consequence of tapering.
CAD - Canadian Dollar
The rally in the loonie had little to do with the Election outcome and more to do with the general risk sentiment. That was evident when risk turned negative and the pair rallied from 1.2750 to a high of 1.28465, before reverting lower as risk chilled out again. Tedious isn’t it! Hopefully, the next 24 hours will prove to be a little less exciting and hopefully easier to trade. We have the FoMC meeting and while there may or may not be hints towards tapering, given the recent rhetoric, the USD should still get stronger although there is debate as to how aggressive the move will be. That said, it the Fed hints toward a firm tapering we should see the USD higher and could be pretty ugly for USD/CAD. A dovish outcome will see Funds lower. So keeping things pretty close to home at this time, awaiting events this evening for potential inspiration.
EUR - Euro
It is all very quiet in the eurozone’s data and event calendar today, so all moves in EUR/USD will be driven by the dollar as markets weigh incoming Evergrande news this morning and the FOMC rate announcement later today. With regards to the FOMC impact, a policy message falling more on the hawkish side than expected should see EUR/USD weakening on USD strength.
A base case for a neutral/moderately dovish announcement compared to expectations would see EUR/USD climb back towards 1.1800 later today – assuming risk sentiment will remain broadly stable into the FOMC announcement.
GBP - British Pound
The pound is surprisingly the worst performing G10 currency in the past five days (-1.4% vs USD). The recent fluctuations in sentiment have been the main cause of weakness in the currency. The underperformance might suggest markets have turned less confident that the BoE will be able to stick to its broadly optimistic tone as it announces policy tomorrow.
Today, expect GBP to move on broad-based market sentiment. Some post-FOMC USD weakness may put a floor below the undeforming Cable, and potentially prompt a rebound to the 1.3700 area.
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