By Michael O’Neill, Agility Forex, Senior Analyst
Summer is over, meteorological summer that is. It ended on August 31. And it also marked the end of the “Summer Doldrums’ for FX markets.
Typically, July and August are not the busiest months but this year was a tad different. The FX majors traded in fairly wide bands with a lot of grumbling about low volumes. Summer ended with the US dollar higher against the Japanese Yen, British Pound, Swiss Franc and the Canadian dollar. The greenback lost ground against the antipodeans (NZD, AUD) and the Euro.
July began with markets wondering about the ramifications from the UK referendum to leave the European Union. That was quickly followed by a “knock-your-socks-off” US nonfarm payrolls report. Traders quickly concluded that if the May report derailed a rate hike, the June data put it back on track.
In the UK, the Bank of England chopped interest rates for the first time in seven years as a pre-emptive strike against Brexit shocks. That move, surprisingly, led to GBPUSD gains, mainly because of the extensive short positions in the market.
The European Central Bank’s inaction at its July meeting and comments left the door slightly ajar for new stimulus policies at the September meeting.
Interest rate chatter from FOMC members rivals the squawks of seagulls at a dump. Photo: Shutterstock
In August, Federal Open Market Committee (FOMC) members were squawking like sea-gulls at a landfill site. San Francisco Fed President, John Williams kicked off the debate when he released a paper that suggested raising the inflation target, which meant lower interest rates for longer. Rate hike sentiment quickly faded.
A flock of FOMC members soon countered. New York Fed President, William Dudley stated that “it was reasonable to expect two rate hikes” in 2016. The rate hike chatter ratcheted up the anticipation quotient for Fed Chair, Janet Yellen’s speech at the Jackson Hole Symposium. She delivered. Her comment that “the case for a rate hike has strengthened in recent months “has given US rate hawks new life.
September is the Final Four, it’s the Home Stretch. And this year it is kicking off what should be an exciting race to year end.
September is chock-full of central bank meetings and for many of them, there is a high risk of policy change announcements. Fortunately, it starts off slowly.
The Reserve Bank of Australia meeting is September 6. They cut rates on August 2 and this meeting will be the last meeting for Governor Glenn Stevens. It is a bit of a stretch to think that the incoming governor and current Deputy Governor, Phillip Lowe, will use his first meeting to cut interest rates.
The Bank of Canada steps up to the plate the next day, on September 7. The BoC is dealing with a sluggish economy, uneven growth and weak employment in a low inflation environment. They are unlikely to announce any policy changes. However, there is a risk that they downgrade there Q3 growth forecast (it is at an optimistic 3.5%). If so, USDCAD will trade higher.
The European Central Bank (ECB) takes the stage on September 8. The July 21 ECB meeting was a non-event. In his press conference, ECB President, Mario Draghi, dropped hints of possible easing in September after conducting a review of the impact of monetary easing. That may kick off another round of EURUSD selling.
The following week it is the Bank of England’s (BoE) turn to dazzle and awe markets. That may not happen. The July rate cut appears to have given the BoE some breathing room while the government sorts out Brexit issues. At the moment there aren’t any, as Article 50 has not been invoked.
The Bank of Japan (BoJ) and the Fed share the limelight on September 21. The BoJ has been disappointed with its last couple attempts of monetary stimulus and announced a review of the program. That report is not due until the end of the month, at the earliest, which means that the BoJ policy meeting will be a non-event for markets.
The Federal Reserve Open Market Committee (FOMC) meeting will not be a non-event. In fact, it will be the major focus, more so than usual. There is a growing chorus of voices inside the Committee that are championing a rate hike. Most importantly, Janet Yellen’s Jackson Hole speech suggests that she supports a move. However, markets are sceptical. The CME FedWatch tool shows the probability of a rate hike in September as 24% . It dropped 6% following the weak ISM Manufacturing report on September 1.
The central bank meetings aren’t the only concerns for financial markets. September has had it’s share of equity market melt-downs.
The Lehman Brothers collapse ushered in the 2007-2008 Financial Crisis and that occurred on September 16, 2007.
The September 11, 2001 terrorist attacks triggered a global equity market collapse and a host of issues that are still being felt.
The UK suffered a George Soros induced Black Wednesday on September 16, 1992 when Sterling abruptly had to exit the European Rate Mechanism (ERM.)
History has a nasty way of repeating itself and the world isn’t short of potential catalysts in 2016.
Turkey has essentially invaded Syria and in the process of attacking Daesh terrorists have also attacked Kurdish rebels, who happen to be US allies.
Russia is extremely unhappy with NATO’s troop deployment in neighboring nations while NATO is still unhappy with Russia’s Ukraine actions.
China has claimed most of the South China Sea as its own territory and said that it would not abide by a ruling made by an international tribune in The Hague. The tribunal ruled China’s claim of sovereignty over the waters had no legal basis.
Any, or all of the above, could trigger another September financial crisis.
The arrival of September heralds the return of both liquidity and volatility to FX markets. The on-going US rate hike debate will ensure choppy but entertaining markets. Enjoy the ride.