USD: More than the Fed bothering the markets - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the reduction in probability of a rate hike next week from the FOMC has not had a lasting impact on financial market conditions with risk aversion very much in evidence that resulted in some big moves in FX yesterday.

Key Quotes

“One factor explaining that is the fact that rhetoric from the FOMC is indicative of policymakers becoming more uncomfortable with a continuation of the current ultra-loose monetary policy stance. So while the FOMC may well hold off next week, the profile for rate increases to be presented next week will still indicate a much more active FOMC than the markets are currently priced for. In a market where investors are questioning the resolve of central banks to maintain easing, this is raising investor concerns.

But now that market participants have returned after a summer lull through July and August, there are other factors coming into play to unsettle investor sentiment. The first is the US presidential election uncertainty. After Hillary Clinton’s “medical episode” at the 9/11 ceremony in New York on Sunday and her recent comment deriding half of Trump’s supporters as “a basket of deplorables” there are emerging concerns over a tightening of the polls that might result in what very few currently assume – a Trump victory.

An LA Times/USC Tracking poll published on the RealClear Politics website had Clinton ahead 45% to 44% last Friday but as of yesterday that poll had Clinton at 43% and Trump on 46%. The history of the poll shows it’s very rare for Trump to lead. Clinton has been quick to act on what happened on Sunday by releasing her recent medical records but questions or uncertainty over the health of a potential president could be hugely damaging and if not managed correctly could easily see Trump maintain this recent momentum. Having said that it is worth remembering that Trump is actually older than Clinton (70 vs 68) and has been far less revealing in the medical details he has also released.

But signs of progress for Trump will be most evident in EM FX under-performance, in particular countries with closer trade ties to the US. So the Mexcian peso and LATAM generally recorded large depreciations yesterday in part on election uncertainty and more volatility lies ahead.”