Between now and next Thursday when the FOMC announce whether or not they are going to raise US interest rates you can be sure of one thing – VOLATILITY and UNCERTAINTY. As I mentioned in our comment this past week, the RISK ON-RISK OFF trading directions continue unabated. It is not that the market is enjoying the volatility, rather it is the uncertainty of what will happen in China and what will the FOMC decide. As far as I am concerned (and a friend at UBS indicated they too are in my camp) the FED will raise rates next week. The general consensus has dropped to 23% for a rate hike, but traders being traders are gambling that the hike is coming. Whatever the result, next Thursday is quite possibly the most important event in the past 6 years…..purely because of the resulting play when the announcement is made and how the market will then perceive the future intentions of the FED. I expect every trader to be at their desk when the announcement is made. Trillions of USD/EUR/GBP/JPY etc will trade as the announcement is made with traders either taking profit or stop losing & get out.
Interesting interview with the China Business Report overnight from a Chinese C.Bank advisor Huang Yiping, who said “intervention in the FX market over many years doesn’t meet fundamental goals of the PBOC’s CNY rate reform”. Huang said “he doesn’t agree that China will use up its forex reserves if the PBOC were to intervene in the currency market for 5-10 years. PBOC is moderately intervening at the moment because it’s concerned about excessively large fluctuations in CNY rate. PBOC’s ultimate goal is to let the market play a bigger role in CNY rate determination. CNY faces depreciation pressure in short term but has appreciation room in longer term. It’s a good time to consider further opening of the capital account as the economy faces downward pressure and country is cautious”. While I do agree in part with his comments, the reason for the recent devaluation was not thought of as early as Q1 2015. Hence with the deterioration of the economy since Q2, the PBoC has simply HAD to act and act aggressively in order to stop the rout. The FED did it, the ECB did it, the ECB is doing it, and the RBoA got involved too. These Central Banks were and are well aware of the consequences of currency devaluation and for that reason they are pleased to see it happen. As the CNY is still “controlled” by the PBoC they had to devalue, the only difference is the devaluation was driven and executed by the PBoC rather than by market forces. Either way it achieves the same results. I applaud the PBoC’s decision and would not be surprised in the coming months to see another devaluation should the economy not show signs of growth.
So for today it’s RISK on, with stocks all in the red (albeit smalls) and the USD on the retreat.
Have a great weekend