The Week Ahead: October – Expect Increased Volatility

Foreign Exchange: The Week Ahead
October – Expect Increased Volatility 
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
While all markets and asset classes reacted strongly last Monday to the attack on the Saudi oil fields with oil prices up 8% on the week, they have quickly returned to their lethargy. It became clear that an escalation of hostilities was not in immediate order, and with the Fed largely meeting expectations on Wednesday, markets have returned to the previous pattern of range trading, consolidation, and small interday and intraday movements. But, we will soon be switching to a new month where history is on the side of increased volatility.

This October is a month that can bring both optimism and pain. Markets remain hopeful of some sort of breakthrough between the U.S. and China regarding trade negotiations that lays the framework for further negotiations and a return to normalcy, even if it is a limited or partial agreement. This could set in motion a risk-on strategy sending equities, interest rates, and commodity prices higher and diffusing the need for additional G7 interest rate cuts. On the other side of that coin, a disappointing deal or no deal at all will set in motion full risk-off market strategies.

Overlaid on top of all of this is the history that October brings for the U.S. equity markets. Here are some examples of the October effect: Panic of 1907, Black Tuesday (1929), Black Friday (1929), Black Monday (1929), and Black Monday (1987). Black Monday, on October 19, 1987, saw the Dow plummet 22.6% in a single day, which is arguably the worst single day in the history of U.S. equities. Obviously the October effect is primarily a psychological expectation rather than an actual phenomenon given the totality of our history. Let’s hope October fits its more recent historical profile and not some of the worst economic times in our country’s history.  

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

9/24 New Zealand Expectations for rates to remain unchanged at 1.00%
9/25 Thailand Expectations for rates to remain unchanged at 1.50%
9/25 Czech Republic Expectations for rates to remain unchanged at 2.00%
9/26 Philippines Expectations for rates to be cut by 25 bps to 4.00%
9/26 Mexico Expectations for rates to be cut by 25 bps to 7.75%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada 

9/23 Manufacturing PMI Expectations for an unchanged print of 50.3
9/25 New Home Sales Expectations for a gain to 653k from 635k
9/27 Durable Goods Orders Expectations for a decline of 1.2% after a 2.0% gain
9/27 Personal Inc. & Spend. Expectations for gains of nearly 0.4% for both indices
9/27 U. of Michigan Survey Expectations for a small gain to 92.1

Europe/Eurozone 

9/23 EZ Composite PMI Expectations for slight improvement from 51.9 to 52.0
9/24 German IFO Index Expectations for a slight improvement from 94.3 to 94.5

Asia/Japan, and New Zealand 

9/26 Tokyo CPI YoY Expectations for a decline from 0.6% to 0.5%
9/24 NZ Trade Report Expectations for a much larger trade deficit in August

FORECASTS

EUR

Whether it is fundamentals, technicals, market positioning, or psychology, euro traders and investors have found an equilibrium point for now despite rising geopolitical tensions in the Middle East and other macro events. The euro has closed between $1.0000 and $1.1100 for the past 13 days. Given the lethargy in the market, I am not confident that closing above or below these thresholds will make much difference but would just establish a new range. 

GBP

The British pound has been the top performing major currency this month rising by nearly 3.50%. A combination of Parliament being in recess (no tribal warfare) and language coming from the DUP party of Northern Ireland regarding a softening of stance regarding Brexit have helped to move the needle for a stronger GBP. Expect further consolidation and sideways trading this week with a slight bias for a stronger GBP.

JPY

Trapped between conflicting forces of rising equities and declining interest rates and multiple cross rates action, traders have been left partially paralyzed regarding the next direction for the JPY against the U.S. dollar. The correlation between the JPY and the near term direction of U.S. interest rate yields remains strong at nearly 0.73% for both U.S. 10-year and 2-year yields. Expect more sideways trading for the week ahead.

CAD

The CAD has been confined to a 1.3000 to 1.3400 range over the past three months, but it has been volatile with bullish and bearish short term trends. Canadian economic data continues to remain solid and the Bank of Canada and the Fed have diverged on monetary policy providing support for the CAD. Uncertainty surrounding the upcoming Canadian election on October 21 could bear watching as the elections tightens up. Expect more sideways trading this week.

CNY

September 3 was a key day for the markets as a thawing of the U.S.-China trade war commenced and further gestures and concessions by both sides continue to create optimism for a limited breakthrough in talks next month. Risk sentiment has improved globally, and the CNY has reflected the overall improvement in tone but is consolidating like many other currencies over the past week or so. Expect further consolidation this week.

AUD

The Aussie and Kiwi have been cratering over the past week or so diverging from their other commodity and energy-linked currency brethren. Ongoing concerns about a faltering Chinese economy rippling through Asia and creating less demand for Aussie and Kiwi exports are at the core of this weakness as the markets anticipate further monetary accommodation down the road.
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