D-Day For The FED: Now What?

The Fed’s two-day conclave ends today with investors eagerly awaiting this afternoon’s statement (no press conference) for any sign of changes in the FOMC’s thinking on rates.

Given that Fed officials have shown sensitivity to financial conditions, and that riskier assets such as stocks and high-yield bonds have been rallying of late, would suggest that investors are being cautious.

While the Fed isn’t expected to raise interest rates this afternoon, the event risk for capital markets would be if the Fed happened to signal that the next interest rate increase could come sooner than many people had anticipated.

1. Aussie inflation plummets, more RBA cuts?

The latest data from down under now gives Governor Stevens at the Reserve Bank of Australia (RBA) the perfect excuse to cut rates. Australia’s Q1 headline CPI hit a seven-year low q/q (-0.2% vs. +0.2%e) and a one-year low y/y (+1.3% vs. +1.7%e). The massive miss is now raising dealer fears of deflationary trends occurring as the economy adjusts itself away from mining. Gas price declines were most pronounced at -10%, though tourism sector was also fairly soft.

Going into the decision, fixed income market probability of renewed easing next week was just above +10% – after the release, dealers are now pricing in a near +50% chance of a rate cut by the RBA.

The miss has pressured the AUD to be the standout underperformer among major currencies. AUD/USD trades at $0.7620, with the potential for a break below $0.76. According to the techies, a drop below this level would leave it open to a drop towards its April 7 low just below $0.75.

2. Oil nears magic number

Apparently the new magic number in the oil industry is $50 a barrel. This is the print that would encourage more drilling or provide the much-needed boost to their cash flow for the top tier producers. For some time the industry has been aggressively shaving costs to stay competitive, and at a price level less than -50% of last years average, they can now be considered somewhat competitive.

In the overnight session, WTI crude again has rallied another +1.9% to $44.86 a barrel, building on yesterday’s +3.3% gain. Supporting prices is a weaker dollar and a surprise -1.07m barrel drawdown in U.S. inventories according to the API data yesterday.

Also providing price support for crude is a report from the World Bank projecting that refinery demand will pick up and U.S. output cuts will steepen in the H2 of 2016. With crude prices trading up against its 200 day moving average commodity sensitive currencies are the big winners. The CAD is now hovering above its 10-month high outright (C$1.2576).

3. The pound’s new lease of life is?

The pound continues to be swayed by one popular poll or another. After getting a boost from yesterday’s morning’s latest ORB poll, which indicated that +51% are for staying in the E.U and +43% for leaving (prior poll was +53% and +43%) another late Tuesday afternoon survey tentatively put the brakes on sterling’s rally.

An ICM poll showed that +44% of Britons would vote to remain in the EU in June while +46% would vote to leave. This had GBP backing away from its intraday peak of £1.4640. Analysts cited bookies’ odds showing a much lower average risk of a U.K. vote for Brexit after supportive comments from U.S. President Barack Obama over the weekend.

It’s only natural that dealers and speculators would be somewhat hesitant to have a too big a position heading into today’s Fed rate decision. However, it’s not just a dollar move, but U.K.-related factors continue to dominate for now. GBP has also being gaining vs. the EUR to a seven-week high (€0.7745).

For technical traders, £1.4670 is the high from back in February and there continues to be a lot of technical chatter surrounding the inverted ‘head and shoulders’ pattern in GBP that has now broken the neckline. Techies would argue a new target projection of £1.49-1.50. A tad rich maybe, but certainly a dizzy height to fall from for any Brexit negativity!

4. Apple has equity markets trading mixed

Is $50b in quarterly revenue a disappointment? Yes, if you are Apple.

After the U.S close last night, the technology giant reported its Q2 results, which ended in March, blaming a fall in iPhone sales, with little else to take its place for its first non quarter revenue growth in thirteen years.

Both Asian and European bourses have been trading mixed, though volumes are still on the light side on the eve of the critical BoJ policy decision (early Thursday morning EDT) and the anticipated ramp-up in hawkish rhetoric from the FOMC statement (no press conference).

Despite the plethora of mixed and pending corporate earning, investors need direction, but will Ms. Yellen and company be able to do that with more clarity today?

5. Hungary Central Bank (NBH) cuts base rate

The NBH did not to get much ‘bang for its buck’ yesterday after cutting the base rate by -15bps to +1.05%, as expected. The HUF (€312.00) edged higher, paring some of its losses, after the decision. EUR/HUF had risen prior to the decision on the possibility of a bigger rate cut. Of late, the HUF seems to be benefiting from a “clear risk-on environment,” with Hungarian assets remaining rather popular with international investors.

Henceforth, analysts expect the overnight deposit rate to gain more significance. It could become more effective if the HUF fails to weaken in response to rate cuts. The NBH may have to start acting outside the box, perhaps cap how much money retail banks may place in their three-month deposit facility to push interbank rates below the benchmark rate.

For many, a significant weakening of the HUF is not on the cards unless the NBH ramps up its rate cuts or indicates that it’s willing to cut rates tangibly below +0.75%,

For now, today’s FOMC fallout will be taking precedence