US Dollar May Add to Post-FOMC Gains on 3Q GDP Data

Talking Points:

US Dollar May Add to Post-FOMC Gains if 3Q GDP Data Tops Estimates
Risk-Averse Dynamics Confined to FX Space in Uneven Overnight Trade
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The sentiment-geared Australian and New Zealand Dollars underperformed while the safety-linked Japanese Yen traded broadly higher in overnight trade. While this seems emblematic of classic risk aversion, a broad-based response across asset classes typically seen at sentiment extremes did not materialize, with mixed performance noted across Asian bourses.

This lack of clarity seems to mirror the broader inconsistency in the behavior of risk trends following the FOMC monetary policy announcement. The outcome was decidedly hawkish, with the US Dollar moving broadly higher and Fed Funds futures showing a greater probability of a December 2015 rate hike. Risk appetite looked indecisive however, with the S&P 500 swiftly erasing an initial spike downward to close at a two-month high.

This presumably reflects competing interpretations of what a Fed rate hike means. The risk-on argument contends that the need to tighten monetary policy speaks to strength of the US economy. The risk-off side of the debate warns that higher borrowing costs will only compound headwinds at a time when global growth is slowing thanks to a slowdown in China and sluggish performance in Europe. The markets are seemingly unsure of which narrative is more compelling thus far.

A bit of clarity may be had as the preliminary set of third-quarter US GDP figures crosses the wires. The annualized growth rate is expected to register at 1.6 percent, down from 3.9 percent recorded in the three months through June. US economic news-flow has improved relative to consensus forecasts recently, hinting analysts’ models are underestimating the economy’s vigor and opening the door for an upside surprise.

Such a result may boost the likelihood of a 2015 Fed rate hike in the minds of investors, pushing the greenback higher. The impact on risk sentiment trends is unclear for now but whatever happens may help establish a dominant paradigm in the days and weeks ahead.

German CPI data is also on tap. The core year-on-year inflation rate is expected to tick higher to 0.2 percent in October after registering flat in the prior month. Price-growth figures out of the Eurozone’s largest economy have printed below consensus forecasts in all but two months since the beginning of the year. More of the same this time around may bolster ECB stimulus expansion bets, punishing the Euro.

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Asia Session

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CCY

EVENT

ACT

EXP

20:00

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RBNZ Official Cash Rate

2.75%