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FOMC Meeting Awaited, as Irish, Greek Debt Finds Ample Demand.

Tue, Sep 21, 2:31 PM ET, by

Bourses around the world were dominated by sales today as traders waited for the FOMC meeting. Gold depreciated, as some speculators were worried about the Fed remaining indecisive on easing, and the failure to breach 1280 brought about a correction.Corporate and sovereign CDS were tighter, while the EURUSD appreciated further. U.S. Housing starts for August showed a rise of 10.5% vs. expectations of a fall of 0.4% which failed to have any impact initially due to the oncoming FOMC announcement, and the uncertainty surrounding it.

Japan's intervention opens Pandora's Box of the currency market

It has been quite some time since the days when frequent and unfettered intervention by governments in the FX market was a routine. Since the 1980's, and especially after the collapse of the Soviet Union, more and more nations have been moving to floating currency regimes, abandoning pegs and controls, while aiming at full convertibility. The framework of a fair, competitive environment where, on the basis of cheap labor, each nation is afforded a chance to move out of poverty has already delivered some spectacular results in Asia, South America, and even in Africa. Yet to achieve a consensus of the properous is not a big task. During the boom years, the path of economic liberalization was easy to advocate. As Japan's intervention shows, however, political pressures, policy errors, and protectionism are slowly causing a comeback of the old methods, with unpredictable consequences.

Japan's intervention may well be the turning point for the next stage in the forex market, since, after all, increased government intervention is regarded nowadays as a given, and manipulation of the FX market is but an extension and a natural outcome of the shift in attitudes. On the whole, the trend is toward less freedom, be it in trade, where it manifests itself in protectionist measures, in forex, where tighter government controls take center stage, or in the business world, where tighter regulation and supervision characterise conditions. Such a situation has both positive and negative consequences, but it is negative for the markets on the whole, since less risk, means higher safety, but also smaller profits.

A lot of nations are feeling the pain of appreciating currencies as the nonsensical policies of central banks flood markets with ever greater amounts of dollars, leading to powerful appreciation trends for most emerging market currencies. It is understandable when Brazil, or Thailand discuss intervention and the impact of appreciation in unfavorable terms, but when even Turkey, as a singular beneficiary of for inflows, cheap credit, and the carry trade ( not to mention an ensuing construction bubble), complains about the strength of its currency, one is tempted to think that something is amiss. Brazil is in focus today for us, with its bulging current account deficit, rising cost of borrowing, and large export sector all suffering from the recent rise of the real.

Readers will naturally contrast this situation with the Chinese case, where the government has been fixing the currency at successively higher rates for the past nine days, as the trend goes on today with a historic 6.6997. It certainly looks like the lower fixes for USDCNY will last until election time. Meanwhile, as President Obama emphasized his dissatisfaction with China's currency policy on Monday, terming it a "real problem", the push for a higher Yuan was joined by Lee XianLong, Singapore's PM, who noted in comments to the press that China "need not go so slow" in its appreciation strategy. We note the strong security relationship between the island nation and the U.S., and explain the PM's statements by referencing the spirit of cooperation that the Singapore has been adhering to over the years as it fears the intentions of its neighbor Malaysia to the north. Singapore, of course, intervenes in the currency market all the time to protect its domestic industries in spite of its gigantic FX reserves, so its call for China to let go of the Yuan does sound somwhat hypocritical.

Irish auction goes very well, Greece bond auction sees record demand

Today's Irish 4- and 8-year government bond auctions went very well, as speculators took advantage of the general optimism about risk to benefit from high yields. Both auctions saw yields significantly higher from the previous one, but demand was strong, implying that there is ample liquidity in the market to take care of the Eurozone periphery's borrowing needs. A small, 13-week Greek auction saw even higher demand, and yields were actually lower, but our attention is drawn to the very short-term maturity. In general, emerging markets have been doing well for the past few weeks, and it looks like Europe's underdogs are benefiting from the trend. Russia, Turkey, Ukraine have all seen sovereign spreads tighten in the CDS market.

In the interbank market, 3-month Euribor broke its downtrend; as it was reported at 0.879% vs. 0.876% on Monday. How significant this move is can only be determined after a couple of days have passed. The ECB, on its part, is sounding extremely dovish, with comments from the Netherlands' hawkish Nout Wellink confirming that no interest rate rise is to be expected from the bank for now.

Finally, we recognize that the FOMC announcement will spark a lot of volatility, but prefer to wait and see the aftermath of the fireworks before we reach conclusions.

This is where matters stand as we await Fed's announcement. The significance of their move is limited to what they will do about the expectations of quantitative easing.

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This Article's Word Cloud:   Brazil   China   FOMC   Japan   Singapore   Turkey   about   after   announcement   appreciation   auction   been   comments   controls   currency   days   even   forex   from   general   government   have   higher   intervention   looks   market   markets   move   policy   rise   risk   since   situation   some   sovereign   speculators   strong   that   tighter   time   today   trend   very   well   were   when   where   will   with   yields

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