There are no surprises - this week is getting off to a slow start, a trait that is threatening to shut the year out as both the Fed and BoJ are expected to deliver conservative messages this week. U.S. policy makers will be looking at damage control in the wake of the 16-day partial U.S. government shutdown. Bernanke and company have been vocal and finger wagging at Capitol Hill indicating that their "house needs to be put in order" before sustainable economic progress can be attained.
The Fed is not in a position to change the rules to the game just yet. Governor Kuroda at the BoJ has not got an easier task. He continues to warn the masses against premature expectations of additional easing just under a year into their own QE program. The crowed trade of being short yen remains a frustrating investment.
The market continues to place the timing of U.S. tapering at early in 2014. However, the "threat of structural consequences from the fiscal impasse" - a scenario the market could be repeating in Q1 next year – is allowing both the markets and investors to "err on the side of caution." The investor's views on U.S. forward expectation have been driving the USD/JPY direction. Mind you, despite Japanese CPI figures appearing consistent with the BoJ's targets, the slower yen depreciation combined with falling energy costs could actually force Governor Kuroda's hand once again. The market is not pricing this in; being dollar long has more to do with the handling of Japan's "structural imperfection and reforms." Central bankers would have anyone believe that a change in a policy stance has more "bang for your buck" when delivered against market expectations. Yesterday's weaker than expected U.S. pending home sales data (-5.6%) seems to have convinced many forex players that tomorrow's upcoming FOMC rate decision announcement will reveal only one thing – more of the same.
Central bank rhetoric continues to gather strength. Not all central bankers are cut from the same cloth – perception is a powerful tool in the "monetary business." Governor Stevens at the RBA happened to announce the most obvious to the market overnight – the AUD is likely to be materially lower in the future. The down under attempt to talk down one's own currency strength (0.9510) was pulled off, but for how long? Stevens noted that the AUD level "isn’t supported by costs and productivity in the economy" and the nation’s "terms of trade are more likely to fall than rise." He added that at some point in the future, it seems quite likely that the AUD will be materially lower than its current level.
The Reserve Bank of India released its macroeconomic and monetary quarterly review overnight, highlighting their concerns on economic growth and inflation. Policy makers have emphasized the deceleration in private consumption and fall in investment, and weak overall domestic demand conditions. Despite inflation having risen above the RBI’s comfort level, better weather conditions should themselves ease pressures on food inflation leading to a compounding easing effect throughout the inflation lifecycle. This, however, comes too late for Indian policy makers, the impatient RBI hiked overnight benchmark rates by +25bps to +7.75% earlier this morning, sending a message that fighting inflation remains their top priority for now.
The dollar is so far giving the perception that we could be in for some movement today, not because of the monetary landscape, but more to do with month-end. The "mighty" greenback is trading a tad firmer outright against the G7 brigade, helped mostly by month-end portfolio readjustment. However, the lack of volume and depth of liquidity could end up having more of an impact that initially believed.
The commodity currency bloc (CAD, AUD and NZD) continues to be pressurized by central bank governor rhetoric. CAD had weaker support from Poloz last week, the AUD had Stevens overnight and the NZD had their governor Wheeler suggesting that a strong Kiwi would delay a rate-hike.
For sterling, its Asian move can be blamed on the technical landscape – talk of large stop-losses triggered the break below £1.6125. The USD/JPY happened to trip higher after the PBoC happened to provide some much needed liquidity – Chinese money market yields were backing up. The key to much further movement from here has more to do with willing active participation. Investors have been wading to the sidelines, looking for "stronger convictions." It's been in short supply of late and not been so forthcoming. Perhaps the beginning of today's two-day FOMC meet will finally shine more light on the situation.