5 Reasons Why This is a Big Week in FX

This is a very busy week for the foreign exchange market and while we're off to a slow start, trading ranges will widen and volatility will increase as the week progresses. Meanwhile the U.S. dollar ended the day higher against some currencies and lower versus others but during the NY session investors spent most of their time buying U.S. dollars. The greenback hit low of 1.1815 versus the Euro shortly after equities opened but ended up settling the day near 1.1750. A similar reversal can be seen in sterling while USD/JPY and USD/CHF bounced off their lows to end the day at their highs. These moves had nothing to do with U.S. data because both the Chicago and Dallas Fed manufacturing reports fell short of expectations. However the prospect of a Federal Reserve rate hike this week could be helping the dollar.

With that in mind, there's a lot more going on this week than the FOMC meeting. Here are 5 big events that we will be watching -

5 Reasons Why This is a Big Week in FX

1. FOMC meeting
2. Q3 End
3. Sept 30th NAFTA Deadline
4. RBNZ Meeting
5. UN Meetings & Central Bank Speak 

The Federal Reserve is widely expected to raise interest rates but it could be a dovish or hawkish hike. The outcome could have a lasting impact on all of the major currencies. At the same time however, since U.S. stocks hit record highs this quarter, portfolio rebalancing will be negative for the dollar. We may have already seen some of those transactions happen earlier this month but we cannot preclude the possibility of additional adjustments this week. The Reserve Bank also has a monetary policy announcement and as usual the RBNZ's outlook could have a significant impact on NZD. Canada-U.S. trade talks will be in focus as the next major NAFTA deadline looms. The U.S. wanted a deal closed by September 30th to abide by the fast track law that requires the agreement to be publicly available for 60 days before it is signed. September 30th is important because Mexico's president steps down on December 1st and President Trump wants the deal signed with the outgoing and not incoming President.

Last but certainly not least, there's a ton of headline risk this week. The UN meeting is under way and there will be a significant focus on trade. Fed Chair Powell, ECB President Draghi, BoE Governor Carney and BoC Governor Poloz are also scheduled to speak and as we saw today, the market is very sensitive to central bank comments.

Draghi sent EUR/USD soaring above 1.18 when he said there's a relatively vigorous pickup in underlying inflation. Although the pair receded from its highs on the back of U.S. dollar strength, the euro should outperform other major currencies on the back of the ECB's brighter inflation outlook and stronger data. Despite ongoing trade tensions, German business confidence improved in the month of September, reinforcing the increase in investor sentiment reported earlier this month. German CPI is due for release later this week and given Draghi's comments, the risk is to the upside for this report.

Sterling on the other hand declined for legitimate reasons. Not only did the CBI's industrial trends survey turn negative in September but Brexit negotiations are getting harder. There was talk that a deal could still be reached by November but there was no material progress. Instead both UK Brexit Secretary Raab and Prime Minister May said they are going to hold their nerve today, which suggests that they are not going to bend easily to the EU's demands. The Australian and New Zealand dollars ended the day lower after China rejected the U.S. invitation to trade talks.

The bottom line is that right now, there's been zero positive developments on U.S.-Canada and U.S.-China trade relations and no improvements in EU-UK Brexit negotiations so uncertainty reigns.