Asia waits for the Federal Reserve

Asian markets already have a quiet look about them, as they remain in wait and see mode ahead of the latest FOMC rate decision that is released in the early hours of tomorrow morning. Currency markets continue ranging, with Wall Street content to buy a bit more big-tech stock and not much else.

The FOMC will leave its target Fed Funds range unchanged between 0.00 and 0.25%, with the press conference 30 minutes later really the day's main event. We expect the Fed to reiterate its lower for longer call on rates, and to do whatever it takes on the liquidity front to support growth and unemployment. We may get some insight into the nuances of their new fuzzy inflation targeting process. 

Still, market watchers expecting an indication of exactly how far they would allow inflation to overshoot 2.0%, and for how long, are likely to be disappointed. In all likelihood, the Fed isn't probably isn't quite sure itself, and will manage that situation dynamically. Chairman Powell could spark the ire of Washington DC, by insisting that the central government must continue fiscal stimulus and quickly. The Fed has consistently stated this need but will likely not get too aggressive on that point ahead of the US elections on November 3rd. It will not wish to be painted as political to either side.

The net result should refuel the buy everything FOMO trade, and it would not surprise me in the least to see Wall Street have a healthy session this evening. In currency markets, an uber dovish Fed could modestly re-energise the soft US Dollar trade, which has been in a holding pattern for two weeks now.

US Retail Sales is released ahead of the FOMC, earlier in the session. It could provide some short-term volatility, with the market expecting the MoM number for August to retreat slightly to 1.0%. An underperformance will be dismissed by the FOMO gnomes ahead of a dovish - and thus equity supportive - FOMC. An outperformance will probably see them clicking the buy button on their equity platforms aggressively.

Japan's Balance of Trade was released this morning and strongly outperformed, rising to Yen 243 bio vs Yen 37.5 bio expected. Like the Indonesian balance of payments data yesterday, the headline number flatters to deceive. Like Indonesia, Japan's surplus jump was driven by a collapse in imports, and not a nirvana-like rebound in their export sector. Contrasting this with the robust data released by China, yet again, yesterday, it highlights that Asia's post-Cobid-19 recovery will be uneven at best.

It was a good night for China at the World Trade Organisation (WTO). China won its case against the United States over President Trump's imposition of tariffs. It will be a hollow victory, though; the US is sure to appeal. The WTO's appellate body is in limbo as the US holds up approval of new judges, so the WTO win by China will quickly disappear into a political black hole.

The data calendar is bare in Asia today, with no data of note until the UK's inflation dump this afternoon. That will suit Asia and Europe, who will content themselves to mark time until the main events in the US this evening.

Equities drift higher in Asia

Wall Street had a non-descript session overnight, with the usual big tech inflows lifting the NASDAQ and the technology components of the S&P 500. The S&P 500 drifted 0.52% higher, the NASDAQ rose 1.21%, and the Dow Jones was unchanged. US equity futures have drifted higher in Asia this morning.

Asian markets have contented themselves to follow Wall Street’s lead quietly as they await the FOMC this evening. The Nikkei 225 and Kospi are 0.10% higher, with China's Shanghai Composite, CSI 300 and Hang Seng unchanged in early trade. Singapore is 0.40% higher with Australia's ASZ 300 and All Ordinaries 0.70% higher. Malaysian markets are closed today.

All in all, Asia looks set for a modestly positive session and will be subject to the whims of headline-driven short-term volatility with the regional data calendar empty.

North Asian currencies continue strengthening

The Chinese Yuan, Korean Won, and Japanese Yen continued to strengthen overnight, but elsewhere in the major currency space, the session was non-descript. The dollar index was finishing unchanged at 93.07 as the G-10 currencies continued to range ahead of tonight’s FOMC decision.

The PBOC set another strong fixing this morning for USD/CNY at 6.7825, the lowest since early May, as the CNY continues to ride the wave of robust China data. USD/CNY is trading at 6.7680 this morning, and baring a surprise from the FOMC, should continue its march towards 6.7000 in the coming days.

The Korean Won is coat-tailing the Yuan, with its healthy beta to the Chinese economy. USD/KRW has broken support at 1180.00, trading at 1178.00 this morning. Assuming the Yuan stays firm, the Won should also strengthen, targeting the 1150.00 potentially in the coming week. However, the Bank of Korea is unlikely to be happy to see the Won appreciate past that point in the near-term.

USD/JPY fell again overnight, drifting 0.30% lower to 105.30. The Yen has strengthened ahead of an expectedly very dovish FOMC outlook tonight maintaining narrow rate differentials. USD/JPY is now withing sight of monthly support at 105.00. A break of that region sets up further Yen strength, with USD/JPY targeting the 105.50 to 104.00 zone initially.

Oil rises overnight, but don't be fooled

Oil prices rallied strongly overnight as hurricanes threatened to, yet again, disrupt US supplies and refining. Brent crude rose 2.50% to $40.65 a barrel, and WTI rose 3.0% to $38.40 a barrel. Both contracts have continued squeezing higher in Asia, Brent rising to $41.00 a barrel, and WTI rising to $38.80 a barrel.

The reason for the rise in oil prices is entirely hurricane driven. None of the bearish fundamentals that have weighed down on oil has changed. Global supplies remain abundant, OPEC+ remains paralysed in wait and hope mode, and the future consumption outlook remains cloudy, to say the least.

If the most recent hurricane passes in America's South without incident, or with minor damage to oil infrastructure, those fundamentals will almost certainly reassert themselves. The price rally overnight looks like one to be sold, and not one to coat tail.

Gold fails at resistance yet again

A weaker US Dollar saw gold mount a feeble challenge to its technical resistance line at $1970.00 an ounce overnight. However, the rally lacked momentum and quickly petered out, with gold retreating to finish almost unchanged at $1954.00 an ounce. 

That same resistance line has moved lower to $1965.00 an ounce today, and an uber-dovish FOMC should be positive for gold and could see it tested once again. Ahead of the meeting decision though, gold is likely to remain contained within a $1945.00 to $1960.00 range.

Gold's longer-term bullish fundamentals remain firmly in place, and barring a surprise, will be reinforced by the Federal Reserve this evening. Gold's support zone between $1900.00 to $1920.00 has fended off all challenges since early August and looks to be the medium-term low for now. The balance of probabilities suggests that gold's next move will be a retest of the $2000.00 an ounce region.