Currency Markets Gyrate Amid Pre-Positioning for Fed Rate Hike

Talking Points:

Currency Markets Correct Friday’s Price Action on Pre-FOMC Positioning
US Dollar May Yield Disparate Response vs. Majors on Fed Rates “Liftoff”
Gauge Trends and Spot Reversals in the Top Currencies with DailyFX SSI

Currency markets are in retracement mode to start the trading week. The Swiss Franc, Euro, British Pound and Japanese Yen are trading lower having outperformed on Friday while the Australian and Canadian Dollars are in recovery mode having been the weakest over the same period. Risk sentiment trends have done an about-face as well: S&P 500 futures are trading sharply higher after the benchmark stock index suffered the worst drop in over two months to close last week.

Price action appears to reflect pre-positioning as markets swing back toward neutral ahead of this week’s much-anticipated FOMC monetary policy announcement. Fed Funds futures suggest markets widely expect Fed Chair Yellen and company to deliver the first post-QE interest rate hike, nudging the target range for the benchmark lending rate higher by 25 basis points into the 0.25-0.50 percent territory. That may prove negative for sentiment.

The Fed’s aggressive easing over the past seven years slashed returns on safer assets and encouraged a reach for yield outward along the risk spectrum. The growing proximity of stimulus withdrawal since mid-2014 might have been expected to begin reversing this dynamic. Various false starts failed gain traction however even as the US Dollar embarked on a long-lasting rally to reflect the looming policy shift.

This warns that a period of portfolio readjustment is still pending and may be triggered in earnest once the rate hike is finally a reality. The ensuing risk aversion may bode ill for the sentiment-linked Australian and New Zealand Dollars, sending them downward alongside stock prices, while boosting funding currencies like the Euro and the Japanese Yen. Within that context, Friday’s moves may have amounted to an early preview of the markets’ disposition, while today’s retracement marks an unwillingness to fully pre-commit before speculation turns into fact.

Asia Session

GMT

CCY

EVENT

ACT

EXP

21:30

NZD

Performance Services Index (NOV)

59.8

–

56.5