Monex Europe: Buckle in, it’s going to get bumpy

Monex Europe: Buckle in, it’s going to get bumpy

Outlook vooruitzichten (08) weg storm crisis

The past week started on a turbulent footing following major developments over the weekend and in the early hours of Asian trading.

In China, the CPI measure of inflation finally rose out of deflationary territory, suggesting that domestic demand conditions are likely improving. This was supported in the early hours of Monday, where credit data showed both households and businesses picking up the increased level of credit, leading markets to begin the week with a slight risk-on bid.

Downside in the broad dollar was also supported by a rally in the Japanese yen after BoJ Governor Ueda suggested that the Bank could have all of the information it needs by December to exit negative interest rates. However, after eight consecutive weeks of broad dollar strength, the dollar’s decline proved short-lived.

A rally in global oil prices on news that Saudi Arabia would voluntarily extend its production cuts until December and more data suggesting there remains a viable risk the Fed hikes rates again in Q4 led the dollar to return trading in the green, with the move turbocharged by Thursday’s ECB decision which shone a light back on the US exceptionalism narrative and re-widened rate differentials in favour of the dollar. All said and done, the dollar DXY index closed the week higher once again, marking nine consecutive weeks of gains.

While the back end of this week proved to be relatively calm, we don’t expect that to repeat next week with no fewer than nine policy decisions set to be announced from Wednesday onwards before global flash PMIs take to the spotlight. Before markets can get to all the excitement, however, there are some warm up events for markets to chew on, with CPI prints out of Canada and the UK published on Tuesday and Wednesday respectively. In both cases we don’t think these releases will shift the balance of risks for the interest rate policy outlook.

Later on Wednesday, then, is when things really start to hot up. Markets will almost certainly get to see the Fed hold rates, though the focus for FOMC watchers will be squarely on the dot plot and any hints of a hike at the November meeting. In contrast, later that evening, an announcement in Brazil from the BCB should see the Selic rate trimmed once again, with any decision to cut beyond 50bps likely to induce a tantrum in markets.

Thursday then brings a day of chaos, with rate announcements in Norway, Sweden, Switzerland, the UK, Turkey and South Africa. The Scandinavian central banks should both deliver hikes, as should the BoE, whereas the SNB and SARB decision look like more of a toss-up. What the CBRT does is anyone’s guess at this point, though we expect at least some tightening to be delivered.

To cap off the week, the BoJ also has a policy decision the following day, though in this case any moves in policy look highly unlikely. Instead markets are likely to shift their focus to growth conditions on Friday, with PMI releases set to test once again if the US exceptionalism story that has been so dollar positive, can remain intact for another week.