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Cheerfulness from the Fed
How happy for the FOMC, they could get over the recent concerns on the global economic slowdown.

The Fed maintained the status quo at this week’s meeting as expected, yet kept the possibility of a rate hike on the table for its December meeting. Interestingly, the Fed dropped its apprehension about the global economic slowdown in its communiqué and brought the focus back on the US labour market and its mid-term inflation target.

Despite the misplaced cheerfulness from the Fed, the feasibility of a December rate hike should be questioned. Could the Fed realistically close its eyes before the rout in the emerging economies as well as the energy and commodity markets? Isn’t the Fed’s manoeuvre margin too tight to make a mistake on the timing of its policy normalisation? Will a December hike be a contaminated by political issues, as the US walks into the critical election year?

The normalisation is data dependent, the other central bank actions should be included in this whatever data the Fed is looking at. It is not only about the US jobs market, the US inflation and the US growth. The rest of the world matters. And we have read it in the weak US durable orders this week and may further confirm it through a weaker third quarter GDP read, expected to be revised down to 1.5% quarterly annualised from 3.9% printed previously.

As a knee-jerk reaction to the hawkish Fed, the US dollar gained across the board, the US swap curve steepened and the 10-year government bond yields rose to 2.10%.

We have seen the euro slipping below 1.10 against the US dollar and there is some profit taking this morning. The improvement in the risk sentiment could well enhance the appetite in euro as funding currency and keep the pair within a reasonable 1.08/1.10 range for the moment yet the ECB seems to be well armed – and utterly determined - to prevent the euro from appreciating. So we can say that the bearish trend is expected to strengthen and that the trend will be euro traders' friend to the end of the year!

Tell us more, BoJ

The Fed hawkishness could prevent the BoJ officials from rushing toward additional monetary stimulus this Friday.

A sustainable improvement in the US yields, with 10-year yields back on their path to 3% in line with an upcoming Fed normalisation, is expected to be supportive for the US dollar against the yen. Even if the BoJ decides to keep its hands clean from an additional cash injection, the USDJPY has the gate open to a revamp toward the 124-125 levels.