Major Overnight Headlines
• Euro Stoxx Banks Index climbs to 2013 highs above the 130 mark in London as Fed maintains the pace
• UK August retail sales volume ex-auto fuel slump 1.0% MoM in August following strong May-July period
• SNB on hold at 0%; says ready to take further measures on the CHF “if required”
It’s too simplistic to describe the morning session in London as another episode of USD weakness. The shock over what the Fed did (or didn’t do) yesterday suggests the first half of today in Europe was more about seeking out pressure points within the system. For our purposes here, the pressure points within in the system are exposed inversely to how they would be exposed if the Fed had tapered by $15-$25 billion or more. The moves this morning were therefore less about monetary policy divergence and more about liquidity, “risk” and the flow of capital.
Along these lines, we cite two unique occurrences this morning, and each piece of evidence is in and of itself very suggestive. The two-day decline in the JPY versus the NOK, SEK, NZD, CHF and AUD is big enough to be considered “about on par” with that of the USD’s. So these fluctuations don’t only concern monetary policy divergence, but also the pressure points in the system associated with the flow of capital and the build-up of imbalances. USD/JPY actually rose this morning in London. Secondly, the Spanish-Italian 10-year spread had been widening in favour of higher yields in Italy, but this morning the spread indicates that there has been a clear preference to buy Italy over Spain. Tapering QE exposes cracks within the system, and not tapering QE covers them up.
Over the very near-term, we are content to view these moves across markets as perfectly reasonable. Speculation will build from here that the Fed is essentially content to view the constant flow of monthly asset purchases as already constituting a form of “QE tapering”, since the proportional rate of increase in the Fed’s balance will continue to decline from here. Versus most of the currencies above, the JPY should more or less remain a sell on rallies more than versus the USD until the Fed cements the idea in our heads that a reduction in QE is highly likely before year-end, or until something occurs which is big enough to drive investors away from “risk”.
Read the full report: FX Daily
BMO