FX Mostly Quiet, Sterling and Dollar-Bloc Heavy

The week's key events kick-off today as the FOMC starts its two-day meeting.   Thursday features Scotland's referendum, the ECB's TLTRO and the SNB's meeting.  Consolidative trading continues to be the dominant theme.  The dollar has been largely confined to yesterday's trading ranges against the euro and yen, which themselves were mostly within the ranges set last Friday.  

Sterling is the weakest of the majors.  It has been turned back after being unable to close the upside gap (~$1.6283 according to Bloomberg), and is trading at four-day lows.  The polls suggest the contest is too close to call while money going into the bookmakers is said to be 3:1 in favor of the unionists (no).  The Commitment of Traders report from the CFTC showed speculative participants (non-commercials) buy sterling in size in the week through September 9, which covers a couple of days after the You Gov poll showed the nationalists (yes) ahead.   

Today the UK reported August inflation figures.  The 1.5% year-over-year pace was spot on expectations and compares with 1.6% in July.  UK inflation has been below the 2% target for eight consecutive months, the longest such streak since H1 05.  Food prices fell 1.1%, which helps account for the low headline number.  The core rate ticked up to 1.9% from 1.8%. 

Minutes from the recent MPC meeting will be released tomorrow.  There were two dissents in favor of immediate hikes in August, but they most likely did not gain any traction.    It is generally recognized that should Scotland vote for independence, the economic shock could delay the BOE rate hike that many see in Q1 15.  We are less sanguine about the immediate economic impact and a deep erosion in sterling could impact the trajectory of prices. 

Separately, the official measure of house prices rose 11.7% year-over-year in July, which is the largest increase since July 07.   Upward pressure on prices seems to have broadened, but this still seems to be a more important issue for the Financial Policy Committee (FPC) rather than the Monetary Policy Committee (MPC).  Or to say the same, the macro-prudential course is still preferable to a rate hike. 

The Reserve Bank of Australia, which released its minutes today, is also wrestling with rising house prices.  This is not a new problem, but the minutes seemed to suggest it is of increasing significance.  The combination of the Australian dollar's decline and the attention on the housing market seems reduce the possibility of a rate cut later this year or early next year that we had been favoring.  The RBA, like several other central banks, appear to be hoping that the coming shift in US monetary policy will do some the work for them. 

Germany’s ZEW was the main economic report from the eurozone today.  The assessment of the current situation deteriorated sharply.  Indeed the 25.4 reading was well below the consensus expectation of 40 after a 44.3 reading in August.  The expectations components slipped to 6.9 from 8.6 but was better than expected.  It is possible that the sentiment surveys are bottoming in Germany.  Factory orders and industrial production surprised on the upside.  The DAX rallied nearly 10% off the early August lows and is holding on to the lion’s share of those gains.  

The euro itself has been confined to a roughly $1.2860-$1.2980 range since the ECB’s announcement on September 4.    Sentiment remains bearish on grounds of the divergent monetary policy between the US and ECB.  However, the short-term market has amassed a large short position ahead of the week’s key events.    The sharp downside momentum has stalled, and the pain trade is a squeeze higher.

The US reports August producer prices, but this is not a market mover.  Tomorrow’s CPI is seen as more significant, but even here, it is recognized that CPI tends to run a bit higher than the PCE deflator which is the Fed’s preferred measure.   The data is unlikely to shape the FOMC discussion, which is likely to center on economic assessment and appropriate forward guidance as QE winds down.  Operational issues relating to policy tools and sequences are also becoming increasingly important.