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Key Themes in the Foreign Exchange Markets.

Financial markets remain volatile as speculations on Fed first rate hike continue to see-saw. When Fed Chair Janet Yellen spoke at the last FOMC press conference, financial market had started to price in a 50% chance of a Fed lift-off this year, however following poor U.S. Jobs report these expectations have been pushed back well in to Q1 2016. As a result, commodities bloc currencies have rallied expecting a continued stimulus for the U.S. Fed. However, the reasons for Fed holding rates are external and related to weak global economy and hence the commodity currencies remain vulnerable to further bad news on the global economy. Also the current rally in Commodity bloc currencies is on the back of the assumptions that RBA, RBNZ and BoC are unlikely to cut rate further, an expectation of further rate cuts by the respective central banks will also be negative for these currencies.

Going forward, we expect China’s economic outlook and U.S. consumer activity to be the deciding factors in the timing of the Fed lift-off. China’s September trade balance and inflation rate this week will shed some light on the state of the Chinese economy and U.S. Retail sales will reveal a bit more about the consumer activity. Positive surprises in these numbers will make investors shift forward their expectation of a Fed lift-off. 

Bank of England MPC October minutes has struck a dovish tone pushing expectation of a BoE first rate hike to Q4 2016. The unemployment rate is relatively low and housing prices is rising rapidly, these points to a falling output gap in the economy which should push inflation up over the coming months. Inflation currently remains low, but we know inflation is a lagging indicator and has a lot to do with weak commodity prices, hence GBP may turn around quickly is economic data improves. UK inflation and unemployment rates come in this week for September and August. Slight pick up in inflation from zero along and drop in unemployment rate will see GBP rally.