The market’s current deliberations are no longer what the November FOMC will bring but what the December meeting could add.
US bonds continue to fly higher with the US 2yr now at 4.55 per cent, the 10 year is at 4.13 per cent.
The implied rate for the Federal Funds rate come the end of December is 4.64 per cent that’s 139 basis points above the current rate. This means a 75-basis point rise in 2 weeks is a lock. It also suggests that a second 75-basis point rise is near enough to a certainty come the mid-December meeting.
All this is keeps the foot on the throat of G10 peers even with the likes of Europe and the UK facing double-digit inflation and therefore rapidly rising interest rates, do not expect that to be enough to reverse what has been seen in the likes of EUR/USD and GBP/USD.
At $0.9775 parity in EUR/USD is a long way off and only a shock in US rates would reverse this position. Sterling is facing a double whack as the UK political turmoil deepened seeing it back to $1.1220 even after the complete U-turn by the new Chancellor of the Exchequer Jeremy Hunt.
The AUD/USD is also facing an interesting headwind. The less hawkish actions of the Reserve Bank of Australia (RBA) have pitted it against the likes of the Federal Reserve. This means AU bond have outperformed global peers, but it also means FX differentials are flowing one way.
Markets have fully priced for a 25 basis point hike at the next RBA meeting but that is nowhere near enough to add any meaningful support to the AUD. Couple this with a stalled employment read for September and some are even suggesting November maybe the peak of the RBA’s cycle.
AUD/USD at $0.627 looks vulnerable and a softer tone in the next RBA meeting could be all that is needed to signal another leg lower.
Finally, USD/JPY has just rise for the eleventh consecutive day, to ¥149.90 highest read since 1990, the BoJ had stepped in at ¥145 but was completely run over at ¥150 does it try again? And if so what if it fails again? Fascinating pair to watch right now.