Markets will be focused on this week’s FOMC meeting. Technically, Fed Funds futures are pricing in a 23% chance of a rate cut, but it is fair to say that realistically almost no one seriously expects any actual movement in rate targets for this meeting. But with markets pricing in an 83% chance of a rate cut at the July 31 meeting, all eyes will be on Mr. Powell and team to see if they are going to throw in a few comments intended to address those building expectations.
On the other side of the pond, we are seeing a very interesting development in market expectations. British pound sterling has been technically one of the most volatile currencies all year, but that volatility has bottomed out hard since the initial March 29 Brexit deadline passed.
Volatility is a key input to the pricing of FX options, which relatively speaking are cheap for sterling right now if you are looking to transact in the next few weeks or months – well ahead of the new October 31 Brexit deadline. The current political situation is pretty interesting. With the resignation of Theresa May as party leader, the race to succeed her has begun in earnest. What was a surprise to many is that this race seems to be over even as it just began. Boris Johnson was the odds-on favorite to win the post after a series of votes and has seemingly wrapped it up right at the beginning here.
BoJo, as he is being referred to in the press, has been pro-Brexit from the beginning, and it seems like the path forward, should he become Prime Minister Johnson, looks clear. He would approach the European Union asking for better terms, he will most likely not get them, and then he would prepare the country for a no-deal Brexit. OK, maybe that is a bit simplistic but it will not be too far from that.
What I found interesting about the option pricing however, is that even looking at how markets are forecasting volatility after October 31, it is not as volatile as before the initial Brexit deadline. I don’t know if this is just due to the usual confusion as to what will happen, or if it is resignation to the notion that it really will be over by October 31, even if the U.K. crashes out of the European Union. My sense is that it is the latter.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
U.S. FOMC Rate
Expectations for rates to remain unchanged at 2.50%
Expectations for rates to remain unchanged at 0.750%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
U.S. Leading Index
Expectations for a decrease from 0.2% to 0.1%
U.S. Manufacturing PMI
Expectations to remain unchanged at 50.5
Expectations for YoY to remain unchanged at 2.0%
Expectations for May to decrease from 0.7% to 0.2%
Expectations for YoY to decrease from 2.1% to 2.0%
UK PPI Output
Expectations for YoY to decrease from 1.8% to 2.1%
Asia/Japan, and New Zealand
Expectations for a decrease from 0.9% to 0.7%
The euro dropped off against the USD by a little over 1 percent, mostly as some give back to the strengthening from two weeks before. This next week will be a US dollar story, and currencies will be responding to what the Fed does on Wednesday.
In line with the main section above, we do not expect much movement in sterling for the week, maybe even for the month as all the fireworks are lining up for the fall. The currency did lose a little over 1 percent this week in line with all the majors.
Yen has been almost completely steady this week. The only way we would see any real movement for the week is if we get any surprises out of the Fed meeting.
CAD also lost a bit of its momentum this week by 1 percent. Besides the national celebration of a NBA championship, we think there could be some strength ahead if we can get the Fed meeting out of the way.
Expect more sideways trading this week until we get to the G20 meeting, then all bets are off. The big item of discussion is whether a print of 7.00 CNY per USD is really off-limits like many market participants think it is.
The AUD lost almost 1.9 percent this week, with its New Zealand cousin losing 2.6 percent for the week. Continuing expectations for a slowdown in China and global growth are putting downward pressure on the currency. Like the rest of the major currencies, The Fed will set the tone for a new world post-Wednesday.
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