Good morning

The market appears to have run out of “fundamental events” today with the FX ranges overnight trading in a tight range. As things stand the wait is on until Thursday at least when the minutes of the September FOMC meeting are published, and the ECB rate decision is announced (no change expected and no post conference scheduled).

As far as the FOMC minutes are concerned, expect some fireworks as the FOMC detail why they paused on the 17th September and kept rates unchanged. As i spoke in length yesterday, if economic conditions remain as they are over the coming months (slowdown in jobs, pegged inflation etc etc) one cannot help but think the FOMC could surprise again and hold rates at 0.00-0.25%. There is the small matter of a FOMC meeting on the 27/28 October, however we are not expecting Pres. Yellen to shock us. All eyes are rather on the December 15/16 meeting where it will again be the date the watch. If you asked me now what I thought, I would answer there is at least a 60% chance the FOMC will hold again. As China’s growth falls to 5% (shame) US jobs in a downtrend and inflation not going anywhere, the FOMC will have no other option but to hold. They cannot risk raising rates in an environment that can only be described as “shaky”. We might very well have moved on from the “financial crisis” of 2008, but that has been replaced by the “economic crisis” of 2015. While the situation in Greece has disappeared from the papers, it has now been replaced by an even bigger story, the slowdown in China. The former was a battle between politicians while the latter is a battle between supply and demand and thus cannot be “controlled”.

With the event risk behind us for now, FX volatility rates have fallen across the curve. EURUSD 1m 9.55/9.85, 3m 9.60/9.80 and 1y9.70/9.90 while GBPUSD 1m 6.80/7.10, 3m 6.90/7.20 and 1y 7.75/8.00 (GBPUSD=EURGBP VOL which is a rare sight to behold). The fact of the matter is if one looks at EURUSD (FX) we have been stuck in the range since mid August (excl the sudden spike to 1.16 and back as quick). The reason why vols have not fallen more (as you would expect when in a range) is the China situation and risk of a rate change in the US is too delicate and can cause sudden gaps in the FX rate. Hence option traders are more inclined to stay slightly long vol as a way of protecting against any sudden announcement. On the flip side GBP vol have been smashed despite the very precarious place the GBPUSD finds itself. I have noted a few days ago, I think GBP(USD) is on its way back to the lows of 1.45’s given the BoE are likely to further delay any rate hike, not to mention the recent disappointing data (excl wage growth). So ask me my thoughts on GBPUSD and my answer is come December the “handle” will be different to what you are seeing now. So those LONG USD, my opinion, stick with them.

Lastly, The RBA (Australia) left rates unchanged. The AUDUSD on the other hand has been hit hard over the past couple months given the close relationship with China. Then again so has the CAD and NZD

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