Dollar sells off amid market jitters over this week’s FOMC decision
14/Sep/2015 • Currency Updates•
The Bank of England provided the main focus for currency traders last week. However, neither the minutes of the meeting nor the expected 8-1 vote for unchanged rates provided much new information and this left Sterling tracking the Euro higher against most world currencies. This rally was powered mostly by increased jitters as to whether the Fed will hike rates at this week’s meeting, as a well as modestly positive revisions to Eurozone growth over the past few quarters. All eyes are now firmly set on Thursday’s FOMC decision, where we still expect a hike, though we acknowledge it will be a very close vote with quite a few dissenting members.
There were signs of stabilisation in emerging markets, where most currencies ended the week well off their recent lows. We note in particular the significant rebound in the commodity-neutral, South African Rand.
Our read of the minutes from the Bank of England MPC meeting last Thursday is moderately hawkish.
As expected, the BoE voted 8-1 to maintain rates at 0.5%. In a key paragraph, the minutes stated that “global developments did not as yet appear sufficient to alter materially the central outlook”. Clearly the MPC is taking sanguine view of recent market volatility. Also, the Minutes mentioned that “some” members continue to see “upside risks” in inflation, relative to the consensus from the rest of the MPC.
This suggests to us that we are likely to see further dissenters calling for immediate hikes, possibly as soon as next month. So long as things globally don’t take a turn for the worse, we believe that this means we are on track for a first hike in February 2016.
Last week we had some modestly positive news about economic growth. GDP growth numbers over the past four quarters were revised upwards, from 1.4% to a marginally improved 1.8% over the first half of the year. This brings the numbers closer to the ceiling of 2%, which the Eurozone economy seems to be unable to break.
The focus now shifts once again to the political scene. Elections in Greece are unlikely to bring back market volatility, since the pro-agreement forces will have an overwhelming presence in Parliament and the main doubt is which party will lead its implementation. More worrisome is the news from Spain, with Catalan regional elections later this month likely to result in a separatist coalition majority, while the rest of the political forces are weak and divided on the issue. We think the markets are being a too blasé about the risk of serious institutional instability in the fourth largest European economy.
A slate of second-tier reports out last week broadly reinforced our view that the US economy is growing at a healthy pace, modestly above potential, in fact.
The JOLTS labour market report on the actual hiring, firing and voluntary job leaving was generally positive, with most of those key measurements of labour market slack back to pre-crisis levels. Housing market indicators are heading north.
To us, this state of affairs is no longer consistent with an emergency setting for US monetary policy, and that’s why we expect an interest rate hike at this week’s FOMC meeting. The call is a close one, however. Market strategists are split almost 50/50 on the issue, and interest rate markets price in about a 28% chance of a hike – not enough in our view. Watch this space!