There was a definite yield differentiator on yesterday’s moves against the US dollar, which was generally in retreat. Those gaining the most were those with the highest interest rates, such as the South African Rand, the Aussie and also the kiwi. The Swiss franc and euro were less eager to join the party. This underlines the view that the market was getting more confident on the likelihood of the Fed keeping interest rates on hold at this week’s meeting. The other point of note was the modest gains seen on the yen. Policy options are far less clear cut for them, with the BoJ also due to publish a review of the impact of recent policy measures at this meeting.
For today, there does not appear to be anything major on the horizon that will upset the overall tone. The Fed’s two-day meeting starts, with results announced tomorrow 18:00 GMT tomorrow. It seems that everyone has talked to within an inch of its death the possible outcome of this meeting, just as was the case September of last year. It’s not just about FX though. We had seen the S&P 500’s correlation with Fed expectation increase June to August as the probability of a September hike receded, but that relationship has broken down in the past 3 weeks, equities more worried about the fact that the economy is showing signs of lagging, rather than benefitting from the low rate environment. Before then, we have the BoJ meeting overnight, with results announced before the start of the European session tomorrow. There is a whole plethora of expectations around what they could or could not do, so the potential for volatility remains fairly strong.