Asia Back In Driver Seat

 | Oct 13, 2016 08:12AM ET

h2 Forex News And Events

Unsurprising Fed Minutes

The FOMC minutes did not hold many surprises, but served to highlight the growing division among policymakers. It is said that the decision to hold off rates was finally made by Janet Yellen. Yet, it appears that several policymakers indicated that raising rates “relatively soon” would be a good thing. The likelihood of a rate hike has not moved much and is now topping at 68%.

We believe that the Fed will raise rates in December in order to save credibility and that nothing more will happen next year. Indeed, normalization rates are several years overdue. We remember the Fed claiming that it would raise rates when unemployment fell 6.5%. This level was reached in April 2014. On top of that, US core inflation has been above the 2% inflation target for almost a year. Actions speak louder than words and we cannot qualify Fed’s actions as hawkish.

From our vantage point, the rationale behind the Fed holding off rates is the massive debt owned by the US government and the fact that higher rates would increase the charge of this debt. Increasing rates 0.75% would still keep debt manageable. The Fed must pay this price to salvage its credibility. Currency-wise, at the moment, the dollar keeps on strengthening and we should see the EUR/USD breaking 1.1000 in the short-term. The American elections are now the new market focus.

h3 Asia Back To Driving Markets/h3

After a brief hiatus Chinese data has come roaring back into focus. Soft data from China increased speculation that global growth is unstable. In US terms, China September trade surplus widened $41.99 bln against $53 bln eyed, with exports falling -10% y/y, imports -1.9%, while a positive read was expected in both cases. However, Chinese commodity imports surged. The result of the weak data was quickly felt across financial markets. Regional equity markets indices and US stock futures fell and global yields reversed their bullish momentum. The weak data indicated that the PBoC will maintain its loose monetary policy and sustain its gradual trade, weighted by RMB deprecation. China's aggressive pursuit of a weaker currency policy will likely generate a deflationary impulse felt in the west, while providing additional conjectural support to the dovish Fed member’s decision not to hike rates.

Elsewhere in Asia, pressure mounts on Thailand's financial markets in the wake of King Bhumibol Aduleyadej’s death. In addition, there are mounting security concerns as the police issue fresh warnings of a bomb plot. There are also increasing concerns that probability of social instability will increase. Over the past tumultuous decade, the monarch has provided a moderating influence to a significantly divided political environment. The stock exchange of Thailand's (SET Index) fell 3.20% today, which culminated in a -11% drop since last week. THB continues to be sold across the board, as USD/THB climbed to 35.87 (below yesterday 35.90 high), off nearly 4% since Oct. 3. Given the political uncertainty, we expected USD/THB to trade higher, our near-term target is 36.