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Bank of Japan Shocks Market

As expected by most economists, the Federal Reserve completed its final asset purchases this month under its latest QE program. In line with forecasts, the final 15 Billion in purchases was reduced at Wednesday’s meeting. The FOMC statement showed only one dissenter in member Kocherlakota:

‘who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.’

The Fed caused no surprises by keeping the phrase:

‘it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month’

Which means that the Fed may be waiting for December’s FOMC meeting – where a press conference is scheduled to follow – in order to explain any wording changes. The statement also brushed off concerns over falling inflation expectations as temporary:

‘Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.’

All in all the statement was considered fairly hawkish, and markets reacted with US Dollar strength; the Euro fell more than one and a half cents after the release along with the AUD, GBP and NZD when measured against the USD.

US GDP surprised the market by coming in stronger than expected at 3.5% which significantly surpassed the expected 3.1%. Markets reacted counterintuitively to this by selling off the US Dollar, which may have been an artefact of the long USD positioning following the FOMC statement.

The RBNZ also kept things as expected by holding interest rates at 3.5%, while removing its tightening bias from the statement. Governor Wheeler also stressed again that the exchange rate remains unjustified and unsustainable despite recent falls.

In breaking news, the Bank of Japan today released its monetary policy statement and surprised the market by increasing its monetary base target to 80 trillion Yen – 10 trillion higher than the market was expecting at 70 trillion. The Yen is selling off dramatically in the aftermath, with USD/JPY spiking over 100 pips higher. The Nikkei has also broke higher on the news

USD/JPY:

usdjpy

Server Time changing to GMT +2

Dear Trader,

On Sunday the 2nd of November 2014, the Pepperstone MT4 Server time will move one hour backwards to GMT +2 hours.

Pepperstone bases MT4 Server time on “5pm New York”, the internationally recognised end-of-day in the forex markets. US Daylight Saving Time will finish this Sunday the 2nd of November 2014. With the US turning clocks one hour backwards the Pepperstone MT4 Server Time will also move one hour backwards.

How does this affect me?

The only noticeable change that you will experience is that the Market Watch time in MT4 will now be set at GMT+2. This might not affect your trading at all – however, depending on your timezone, this may cause the market to open hour later on Monday. The MT4 server time will still open at 0:00 on the charts.

What action must I take?

  • If you are using an EA with a GMT offset setting, then you must change the GMT offset to +2 prior to the market open on 2nd of November.
  • If you do not use an EA with a GMT offset, no action is necessary.

If you have any questions or need assistance we are here to help you.

Kind regards,

The Pepperstone Team

Server Time Changing from GMT +3 to GMT +2

On Sunday the 2nd of November 2014, the Pepperstone MT4 Server time will move one hour backwards to GMT +2 hours.

Pepperstone bases MT4 Server time on “5pm New York”, the internationally recognised end-of-day in the forex markets. US Daylight Saving Time will finish this Sunday the 2nd of November 2014. With the US turning clocks one hour backwards the Pepperstone MT4 Server Time will also move one hour backwards.

How does this affect me?

The only noticeable change that you will experience is that the Market Watch time in MT4 will now be set at GMT+2. This might not affect your trading at all – however, depending on your timezone, this may cause the market to open hour later on Monday. The MT4 server time will still open at 0:00 on the charts.

What action must I take?

  • If you are using an EA with a GMT offset setting, then you must change the GMT offset to +2 prior to the market open on 2nd of November.
  • If you do not use an EA with a GMT offset, no action is necessary.

asg2

Forex Market Review – Traders Wait on the FOMC

Weak Durable Goods Orders caused a brief rally in risk assets last night, with both the Core and Non-Core figure missing expectations at -0.2% vs. 0.5% and -1.3% vs. 0.4% respectively. Most USD pairs rallied on the news with EUR, GBP, AUD and NZD all gaining half a cent against the US Dollar. This data point is the last of significance before the FOMC statement and monetary policy decision tonight.

Following the FOMC statement (21:00 server time), the BEA will release US Advance GDP on Thursday (15:30 server time). Analysts expect a strong figure of 3.1%, which is slightly down from the previous result of 4.6% – a number which was strongly influenced by a rebound from the first quarter’s weather induced negative growth. If the Federal Reserve proceeds with its expected stimulus withdrawal, there will be added pressure for a good number to justify the central bank’s move. Chair Yellen may also take the opportunity to discuss the statement in her speech in Washington (16:00 server time Thursday).

Immediately following the FOMC statement, the RBNZ will decide on the New Zealand overnight interest rate. No change is expected at this meeting, with inflation at a manageable level and house prices under control through macro prudential regulation. Economists expect the RBNZ to continue with the phrase “it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment”, however it is possible that the bank alters the phrase “Nevertheless, we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained.” to reflect recent fundamentals.

The FOMC Statement:

What is happening: Today the Federal Reserve will release its monetary policy statement. The Federal Open Market Committee will provide their monetary policy decisions along with a statement explaining them and forecasts on the future path of interest rates.

What is expected: Up until recently, the Federal Reserve’s latest round of Quantitative Easing was almost unanimously expected to conclude by reducing the purchased amount by 10 Billion per month, with the final amount to be reduced by 15 Billion at the end of this month. This is still the most widely expected outcome by analysts and economists, with only a minority expecting some change to this path of normalization.

What are the rumours: Volatility across markets in October has led some to call for the central bank to extend its purchase program out to December, in order to settle markets; these calls have been amplified by global inflation trending lower and Oil price declines pushing inflation expectations below central bank targets. Inflation expectations implied from the spread between inflation protected treasuries and their standard counterparts are falling to levels which have, in the past, implied further easing.

Inflation Expectations

The last FOMC Meeting Minutes, revealed this month, showed that some members were concerned about the pace and scale of the recent gains in the US Dollar against a broad basket of other currencies, though in particular the Euro. These concerns were expressed prior to the EUR/USD exchange rate falling a further four cents, so they may have increased in the month that followed. Some important sections of the minutes caused a sell-off in the US Dollar after its strong rally:

The staff’s medium-term forecast for real GDP was also revised down a little, reflecting a higher projected path for the foreign exchange value of the dollar…”

 “Over the intermeeting period, the foreign exchange value of the dollar had appreciated, particularly against the euro, the yen, and the pound sterling. Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.”

The Federal Reserve has a dual mandate to ensure maximum employment and stable prices. The first part of this mandate is being fulfilled gradually as the unemployment rate continues to decrease steadily towards a level consistent with the long term natural rate of unemployment.

The second part of the mandate is what has caused some to speculate that the Fed will reverse course; inflation remains around 1.5% by various measures while the Federal Reserve targets inflation of 2%. Should the Federal Reserve decide to change its course, market volatility could be quite extreme as US Dollar positioning is currently near record levels in anticipation.

This is a notion supported by FOMC member John Williams:

“If we really get a sustained, disinflationary forecast … then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider,”

Another possibility is that the FOMC members alter their expectations for the future path of interest rates; this is likely to have a smaller impact on markets than changing course on Quantitative Easing, however it may be a more likely possibility. FOMC members, at the last meeting, increased their expectations for the Fed Funds rate next year, implying a fairly strong tightening cycle over the course of 2015 of over 100 basis points or 1%. Given the movements in markets since the last meeting, it would not be surprising to see the forecasts take a step backwards.

The FOMC’s longer run forecasts are ironically – or ominously – now forming a downwards pointing arrow despite recent upwards adjustments:

feddots

Changes to the statement are another source of uncertainty. Much focus has fallen upon the use of ‘Considerable time’ as an indicator of how long after QE ends the market should expect rate increases. There has been discussion in the minutes about moving this wording to reflect that the decision will be ‘data dependent’, rather than on a set time-frame. It is not clear exactly how the market would react to such a change, but it would likely cause some volatility.

Why it is Important: This month’s statement has a high chance of seeing, at least temporarily, the end of the US Federal Reserve’s experience with unconventional monetary policy in the form of asset purchases. Since the GFC recovery began over 5 years ago, markets have only experienced a world without QE for a little over eight months all up, with the remainder of the time spent under the sequence of QE1, QE2, Operation Twist, QE3 and the QE3 expansion.

Both periods without QE saw significant market corrections in equities, with US long term bonds rallying sharply under the uncertainty that followed. FX markets have been similarly affected, with risk currencies rallying under the asset purchase programs. Traders have already priced in some of the risk, however it is yet to be seen whether this US Dollar strength continues in to a long-term bull market or whether the Federal Reserve panics and backs down by re-opening the liquidity floodgates.

Forex Market Review – The End of the QE Era?

What is happening: On Wednesday the 29th of October the Federal Reserve will release its monetary policy statement. The Federal Open Market Committee will provide their monetary policy decisions along with a statement explaining them and forecasts on the future path of interest rates.

What is expected: Up until recently, the Federal Reserve’s latest round of Quantitative Easing was almost unanimously expected to conclude by reducing the purchased amount by 10 Billion per month, with the final amount to be reduced by 15 Billion at the end of this month. This is still the most widely expected outcome by analysts and economists, with only a minority expecting some change to this path of normalization.

What are the rumours: Volatility across markets in October has led some to call for the central bank to extend its purchase program out to December, in order to settle markets; these calls have been amplified by global inflation trending lower and Oil price declines pushing inflation expectations below central bank targets. Inflation expectations implied from the spread between inflation protected treasuries and their standard counterparts are falling to levels which have, in the past, implied further easing.

Inflation Expectations

The last FOMC Meeting Minutes, revealed this month, showed that some members were concerned about the pace and scale of the recent gains in the US Dollar against a broad basket of other currencies, though in particular the Euro. These concerns were expressed prior to the EUR/USD exchange rate falling a further four cents, so they may have increased in the month that followed. Some important sections of the minutes caused a sell-off in the US Dollar after its strong rally:

The staff’s medium-term forecast for real GDP was also revised down a little, reflecting a higher projected path for the foreign exchange value of the dollar…”

 “Over the intermeeting period, the foreign exchange value of the dollar had appreciated, particularly against the euro, the yen, and the pound sterling. Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.”

The Federal Reserve has a dual mandate to ensure maximum employment and stable prices. The first part of this mandate is being fulfilled gradually as the unemployment rate continues to decrease steadily towards a level consistent with the long term natural rate of unemployment.

The second part of the mandate is what has caused some to speculate that the Fed will reverse course; inflation remains around 1.5% by various measures while the Federal Reserve targets inflation of 2%. Should the Federal Reserve decide to change its course, market volatility could be quite extreme as US Dollar positioning is currently near record levels in anticipation.

This is a notion supported by FOMC member John Williams:

“If we really get a sustained, disinflationary forecast … then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider,”

Another possibility is that the FOMC members alter their expectations for the future path of interest rates; this is likely to have a smaller impact on markets than changing course on Quantitative Easing, however it may be a more likely possibility. FOMC members, at the last meeting, increased their expectations for the Fed Funds rate next year, implying a fairly strong tightening cycle over the course of 2015 of over 100 basis points or 1%. Given the movements in markets since the last meeting, it would not be surprising to see the forecasts take a step backwards.

The FOMC’s longer run forecasts are ironically – or ominously – now forming a downwards pointing arrow despite recent upwards adjustments:

feddots

Changes to the statement are another source of uncertainty. Much focus has fallen upon the use of ‘Considerable time’ as an indicator of how long after QE ends the market should expect rate increases. There has been discussion in the minutes about moving this wording to reflect that the decision will be ‘data dependent’, rather than on a set time-frame. Most institutions are suggesting this change is more likely to occur in December when the statement will be accompanied by a press conference. It is not clear exactly how the market would react to such a change, but it would likely cause some volatility.

Why it is Important: This month’s statement has a high chance of seeing, at least temporarily, the end of the US Federal Reserve’s experience with unconventional monetary policy in the form of asset purchases. Since the GFC recovery began over 5 years ago, markets have only experienced a world without QE for a little over eight months all up, with the remainder of the time spent under the sequence of QE1, QE2, Operation Twist, QE3 and the QE3 expansion.

Both periods without QE saw significant market corrections in equities, with US long term bonds rallying sharply under the uncertainty that followed. FX markets have been similarly affected, with risk currencies rallying under the asset purchase programs. Traders have already priced in some of the risk, however it is yet to be seen whether this US Dollar strength continues in to a long-term bull market or whether the Federal Reserve panics and backs down by re-opening the liquidity floodgates.

Also This Week: Before this week’s FOMC statement there is minimal news scheduled. German Ifo Business Climate is released tonight, which tends to be an important figure for markets – the index is expected to decrease slightly to 104.6 from 104.7. The ECB also released its stress test results yesterday for the 130 largest banks in the Euro Area. The findings were as follows:

o    Capital shortfall of €25 billion detected at 25 participant banks

o    Banks’ asset values need to be adjusted by €48 billion, €37 billion of which did not generate capital shortfall

o    Shortfall of €25 billion and asset value adjustment of €37 billion implies overall impact of €62 billion on banks

o    Additional €136 billion found in non-performing exposures

o    Adverse stress scenario would deplete banks’ capital by €263 billion, reducing median CET1 ratio by 4 percentage points from 12.4% to 8.3%

On Tuesday traders will focus on news out of the US. Durable Goods Orders will be released (15:30 server time), with economists looking for numbers of 0.5% and 0.4% for the Core and Non-Core figure – a fairly dramatic improvement on last month. Conference Board Consumer Confidence is also out (17:00 server time), and confidence is expected to pick up to 87.4 from 86 previously.

This data is likely to be in less focus than both the FOMC statement and Advance US GDP reading which follows on the Thursday. Both are going to be crucial to near term direction for FX markets.

Forex Market Review – NZD Drops on Weak CPI

The New Zealand dollar fell sharply yesterday after the quarterly CPI figure missed expectations. Economists had forecast a 0.5% quarterly increase in the index, however the data showed a weaker 0.3% rise. The annual change was also weak at 1%.

cpi

The Kiwi dollar declined by over one cent after the release, touching as low as 0.7795 against the US Dollar. This morning’s trade Balance figure also showed a deterioration, however that was on the back of an increase in both Imports and Exports; the trade balance was -1.35 Billion against an expected -0.620 Billion.

PMI’s released yesterday were broadly positive, with Chinese HSBC Flash Manufacturing PMI announced at 50.4 on expectations of 50.2 – the Australian Dollar rose half a cent in the following hours, but later erased all gains. European PMI’s were likewise quite strong with German Manufacturing showing a reading of 51.8 on a forecast of 49.6; this was also reflected in the Euro wide figure which showed expansion at 50.7 against expectations of 50.0. The Euro rallied half a cent on the news.

Still to come tonight will be the release of UK Preliminary GDP (11:30 server time). The figure is expected to show quarterly growth of 0.7%. The Pound sits at 1.6040 after recovering from losses yesterday due to the release of dovish minutes of the MPC meeting.

Forex Market Review – Chinese Growth Lowest Since GFC

The Australian dollar jumped higher on the news that Chinese growth had fallen less than expected yesterday; GDP growth came in at 7.3% against a forecast of 7.2%, though this was lower than last quarter’s 7.5% and was the weakest growth number since the GFC. Industrial production bounced back after the previous 6.9%, reading at 8.0% which was seen as a positive for Australian commodity exporters. The Australian dollar jumped three quarters of a cent after the announcement, but later retraced this move ahead of today’s CPI release.

The CPI data showed a much expected moderation in the inflation rate, due to the removal of the carbon tax – which put downward pressure on utilities and energy prices. The fall in the Australian dollar also came a little two late in the quarter to provide an impact on imported goods. Quarterly CPI rose at 0.5%, while the year on year figure was down to 2.3% after 3% last time. The RBA’s chosen measure of inflation – the Trimmed Mean – fell slightly below expectations at 3.5%; this is right in the middle of the RBA’s 2-3% target band and would not create any drastic calls for a rate movement. The majority of the increase came from food, alcohol & tobacco as well as housing.

cpi1

For those wanting some direction on the future path of Australian interest rates it will be a long 3 months until the next data point.

Tonight focus will shift to the UK and America, firstly with the BoE/MPC to release the committee’s votes on the interest rate (11:30 server time). After the recent fall in oil prices and the decline in inflation expectations, calls for interest rate rises have been played down; committee members are expected to remain unchanged from the previous release where two members (McCafferty and Weale) voted for rate increases and the remainder for no change.

The US will follow Australia in releasing its monthly CPI figures today (15:30 server time) – both the Core CPI and CPI figure are expected to rise from last month, at 0.2% and 0% respectively, despite the fall in commodity prices and the rise of the US Dollar. Just after this (17:00 server time), the Bank of Canada will decide its key interest rate; as has been the case for some time the bank is not expected to make a move on rates while Inflation remains benign at 2.

Focus will shift back to Asia on Thursday morning when RBA Governor Glenn Stevens will be speaking at the AGM for APCA (00:00 server time). Stevens is unlikely to announce anything drastic given today’s inflation rate, however as central bankers are always inclined to do – be on the lookout for jawboning of the Australian dollar and any discussion of Property prices and the introduction of Macro Prudential policy. New Zealand CPI follows shortly after (00:45 server time) – economists expect a reading of 0.5% growth, quarter on quarter. Asian trading should wrap up with the release of HSBC Flash Manufacturing PMI (04:45 server time) which is expected to be unchanged at 50.2.

Forex Market Review – Focus on Asian Data

It’s looking like an interesting week for Asian and Australasian economies; Australian and New Zealand Inflation data will be due for the previous quarter as well as Chinese GDP growth. All are likely to be market movers as well as potential new information from the RBA on the path of interest rates. Australian dollar volatility should be expected through the week.

Tuesday will start with two crucial points of information – the RBA Monetary Policy Meeting Minutes (03:30 server time), followed shortly by Chinese GDP (05:00 server time). The RBA has continually signalled a period of interest rate stability while it tries to give some leeway to a hot property market in order to offset the end the mining capital expenditure boom that peaked in 2013. If the RBA board begins to lean one way convincingly it is likely to show up in the minutes first, followed by a change in the wording of the policy statement at subsequent meetings. By the time a rate decision comes there should have been ample clues dropped through both of these channels.

Chinese GDP is also likely to be watched closely; it has been 3 months since the last figure and global fears have accelerated as the US Federal Reserve has been removing its stimulus measures. During this time the Chinese housing market has been in a broad decline, and Iron Ore prices have been plummeting with other commodities such as oil. Such weakness indicates both an oversupply from Australia’s mining boom, as well as a general weakness in demand from the world’s largest Iron Ore importer. Such weakness it expected to be reflected by a slowdown in Chinese growth; economists now expect the manufacturing powerhouse is now growing at 7.2%. Any deviation towards the psychological panic level of 7% is likely to bring calls for stimulus measures – something the Chinese government wishes to avoid if possible in order to re-balance its economy away from unsustainable sources of growth.

The first half of the week should wrap up with the Australian CPI figure on Wednesday (03:30 server time) – another release which is likely to be in strong focus. The quarterly inflation figure is forecast to be 0.4% in Q3, with inflation due to the rapidly depreciating Australian dollar not expected to show up until the next quarter as it occurred quite late in Q3. Economists are also expecting the removal of the Carbon Tax to take out some of the inflationary sting by lowering the cost of power and utilities. Traders should be on alert for the figure, as it is only released every three months it can have a strong impact on the AUD.

Forex Market Review – US Rate Path in Question

It has been a fairly wild week in markets, with volatility expanding from FX to Equities and Fixed Income. The much-tracked SP500 index dropped sharply and US long term treasuries spiked higher on what appeared to be capitulating short positions. This unwinding of positions also took place across most USD currency pairs, causing some very dramatic moves on Wednesday.

US Retail Sales and PPI data showed weakness in the US economy, with Core and Non-Core Retail Sales coming in at -0.2% and -0.3% against expectations of 0.2% and -0.1% respectively. The PPI figure also fell in to negative territory, at -0.1%.

The figures were bad, however much of the extreme market reaction is likely due to the lop-sided positioning on most assets which are US Dollar denominated. Long positioning on the US dollar was overwhelming, and Wednesday’s figures put a damper on sentiment towards the US economy – putting many trades in to reverse.

The Euro rose two and a half cents against the US dollar after the release, while GBP, AUD and NZD all rallied between one and one and a half cents. Interest rate and bond markets remain in disbelief over the path of interest rates for the US economy, with the market now pushing back US rate rises until around the end of 2015.

There has also been some suggestion that the Federal Reserve may in fact need to continue with its asset purchase program at the end of this month; while this is currently a rumour, it would certainly not be against the Federal Reserve’s dual mandate of tending to Employment and Inflation. Inflation expectations are currently plummeting, and with the price of Brent and WTI plummeting in tandem, a strong US dollar is putting pressure on FOMC members to reconsider their expected policy tightening. This month’s volatility makes the October Fed meeting one to watch out for.

Forex Market Review – US Dollar Strength Returns

The US dollar gained again against most major currencies after a slew of economic data released overnight showed worse than expected figures. The bad data started in the UK, with CPI, PPI and HPI all coming out worse than expected; 1.2% vs. 1.4% for CPI; -0.6% vs. -0.4% for PPI; and 11.7% vs. 12.3% for HPI. The figures indicate that talk of a rate hike in the UK may be premature – a realisation that seems to be spreading across developed countries in the wake of falling inflation numbers and failure for economic growth to take off to any substantial degree.

The Pound fell 130 pips after the announcement and reached as low as 1.58828. With the inflation numbers out of the way, focus will move on to tonight’s employment numbers. As a reminder, economists are expecting a fairly strong report, with Earnings forecast to grow 0.7% and the Claimant Count to decrease by around 32,400 – in line with trend.

The Euro also fell, with German ZEW Sentiment revealing a deterioration in conditions in the eyes of analysts; the index fell from 6.9 to -3.6, well below expectations of 0.2 and edging in to pessimism territory – the Euro dropped half a cent after the release, helped lower by US Dollar strength. Mario Draghi is set to speak twice today at a Statistics conference, followed by ‘European Cultural Days’ – both organised by the ECB. Neither speech is expected to be market moving, however it may be helpful to be aware of both.

In the US, Retail Sales and PPI numbers are due tonight; the Core Retail Sales figure is expected to remain positive though slightly lower at 0.2%, while the Non-Core figure is forecast to dip in to negative territory at -0.1%. PPI is expected to be barely changed at 0.1% month on month. Due out within the hour is Chinese CPI, with economists expecting a weak read of 1.7%

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