Climacteric Catalonia

In addition to consternation in Catalonia, the start of Q4 brings a deluge of central bank speakers along with the main sentiment and inflation prints. Forex markets will continue to be sensitive to headline risk so we should expect conditions to remain whippy.

But traders will continue to be vigilant as they search the news tickers for headline clues as to who the next Fed Chair will be, and how the tax reform process is going.

President Trump advised that he expects to decide on the next Fed Chair in the next two to three weeks. Newswires were abuzz that former Governor Kevin Warsh was Trump’s frontrunner.

Rabid price action closed the door to a significant Q 3, a quarter  greately influenced by political and geopolitical concerns topped off by shifting central bank narratives.

Both the S&P and NASDAQ rocketed higher with the latter pulverising its record close staged on September 15, this despite US bond yields recording outside months with interest rates climbing aggressively on the inflationary prospects from US tax reform. Unquestionably the US administrations Tax Plan has breathed some life into January’s Trumpflation trade.

In addition, Friday’s  bond flows were influenced by the future course of US monetary policy after reports surfaced that former Fed Governor Kevin Warsh will be steering the Fed ship come 2018. Warsh is viewed hawkish by the markets, critical of QE and an advocate for a faster pace of policy normalisation.But with Dr Yellen sounding ever so hawkish these days, regardless of who is at the Fed helm, a significant policy shift could be in store.

As for Monetary Policy, equity markets continue to take an entirely different view than Bond Markets as stock market euphoria rages on propelled by tax cuts and perhaps a misguided belief that history will repeat itself as equity markets have risen seven times in the last eight years between October and December. But given the changing dynamics at the Federal Reserve and with a shift to a faster rate of policy normalising all but certain, something will come out in the “Warsh.” sooner than later

While the controversial Catalan referendum in Spain dominated weekend headlines, the markets still believe the risk of Catalonia leaving Spain remains low, and the Euro has completely sidestepped this political risk in early APAC trading.

Japanese Yen 

JPY is wedged between different triggers as the market ebbs and flows in the mid to high 112 The Japan elections this month present significant market risk, and trading JPY will remain extremely tricky. It’s more likely that interbank players will reduce risk with Abe approval rating declining so this may not be the easiest game in town.

Australian Dollar

The AUD/USD is unchanged from Friday’s closing level choosing to ignore the Chinese PMI reports released over the weekend which came in better than expected. But I would expect this China data to temper AUD selling at current levels.

The markets remain focused on the next Fed Chair and US Tax reform which should be the main triggers for the USD this week. I expect traders will keep eyes peeled and ears to the ground for shifting headline risk.

Asian FX
Asian FX is coming off its worst move of the year arguably driven by short covering on mostly oversold USD positioning with US Tax Reform and Fed Chair banter providing both the fiscal and monetary catalyst. Now with positioning risk much cleaner. Investors may take advantage of pockets of opportunity in the MYR, KRW and THB currencies as these exporting economies should continue to do well on the back of the global growth narrative despite higher US yields. However, the top yield appeal in the IDR and INR may wane until both US dollar Tax Reform driven appeal abates.

As a reminder, CNY is out for the whole week due to Golden Week, so we should expect diminished liquidity conditions during Asia Hours

EURO

The Euro remains in broad ranges but the markets bullish medium-term bias remains unfettered