This afternoon Ben will be speaking
And pundits will do their critiquing
But ere that occurs
The stat he prefers
Will show the economy’s creaking
Welcome to Wednesday, the first big data day of the week! But both tomorrow, with the BOE and ECB decisions and Friday with the US payroll report are set for excitement as well. Early on today we will see the ADP Employment figures (exp 180K) then Q2 GDP (1.0%, down from 1.8% in Q1). Chicago PMI will probably be lost in the shuffle (54.0) and finally, this afternoon at 2:15, the FOMC Rate Decision (no change at 0.25%) and more importantly its accompanying statement. All eyes will be on the statement as market participants await clues for the next move by the Fed and the corresponding impact those moves will have on every market. What we have learned since the last meeting is that the Fed has begun to seriously consider the issue of ending QE. However, given the tangle of policy initiatives; QE, rates and forward guidance, they have had some difficulty fine-tuning the exact process. It has been 2 weeks since Bernanke testified before both the House and Senate, and we have not heard very much in the interim. Markets have seemed to stabilize during this period, but there remains significant uncertainty over when and how monetary policy will be adjusted further.
With all that said, I think this morning’s data should be seen as quite important. After all, the Fed has made it clear they are watching the data closely and have created formal data triggers for policy adjustments. The ADP data should be seen as a harbinger for Friday’s numbers, and the GDP data is important as a gauge of the Fed’s success. Strong numbers should lead to a stronger dollar, at least somewhat, but this data is really just adding to the body of knowledge with regard to when QE is going to end. And of course, this afternoon’s statement will have a much more direct influence on that. I continue to like the idea I mentioned yesterday, put forth by Professor Tim Duy of Oregon, that the Fed is trying to adjust the mix of policy but not the amount of ease. We shall see.
It is no surprise that the overnight session has been rather dull as everyone awaits today’s news. G10 currencies are all trading within recent ranges with only the AUD on the verge of a breakout. It has slipped a bit more after yesterday’s RBA comments.
In EMG, LATAM currencies seem to be the worst performers of late, especially BRL which has traded to its weakest point in almost 5 years. The situation there is starting to get out of control. President Rousseff seems to be losing her authority, the people are demonstrating in the streets, inflation is trending higher and growth continues to slow. This is not a combination of events that favors a strong currency, and as I wrote back on June 21, the odds of USDBRL rising to 2.50 or beyond are growing. We have just breached the highs made that day and it feels as though there is plenty of momentum for further movement right now. But it is not just BRL that is weak, both MXN and CLP are amongst the worst performers in the emerging markets during the past week as well.
What I have observed of late is that there is no broad dollar trend. Rather than simple risk-on/risk-off, we are seeing markets differentiate between specific national risks, like Australia’s pending rate cuts weakening the AUD or Poland’s move to a Current Account surplus leading to a stronger PLN. On the whole, this is a healthy situation as markets do a better job of allocating risks and assets in this environment. Alas, my concern is that the Fed will have the ability to undo this process by its statement this afternoon. We are about to embark on several days of significant information flow, and I think the only thing of which we can be sure is that FX markets will not be at the same levels Friday afternoon as they are right now.
As I type here are the rates:
EUR – 1.3260
JPY – 97.75
GBP – 1.5205
AUD – 0.9030
BRL – 2.2825
MXN – 12.7050
INR – 60.374
Let’s see where they are Friday afternoon.