Market is anxiously anticipating for Fed's FOMC tomorrow. Greenback leans to neutral bias and is traded variously, even though market has already predicted the absence of rate hike announcement. So, what are we actually expecting from Fed?

Market is anxiously anticipating for Fed's FOMC tomorrow. Greenback leans to neutral bias and is traded mixed, even though market has already predicted the absence of rate hike announcement. So, what are we actually expecting from Fed?

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Feeds For Speculation

Based on the latest change from Fed Funds Futures, market no longer expects the Fed to increase rates within this year. Instead, the prospect is now shifted to 2016. That change was followed by ECB's statement regarding its readiness to expand stimulus and PBoC's decision to cut their benchmark rates. Those factors has managed to increase speculative movements in the market, and attentions now turn to BoJ, RBA, and SNB, the next 3 central banks which are predicted to follow ECB and PBoC's steps in further easing their monetary policies.

With the huge amount of speculative positions, this week's trading will be prone to unexpected price movement. In this case, Fed's FOMC result is pointed as the number one factor capable of triggering unanticipated volatility.

In a scenario where post-FOMC statement doesn't really give something new, there will be no significant impact to the market. But if what happen is the other way around; FOMC unexpectedly withdraws their intention in hiking rate, or delivers a hawkish statement, then market will see an unforeseen increased volatility. Theoretically, any positive clue on rate hike will directly boost US Dollar. But on the downside, panic will ensue in other financial assets like stocks, bonds, and commodities, resulting in a more complicated situation where it will be extremely hard to predict how the unexpected volatility is going to end.

Let's assume FOMC is really going to indicate a change, which one is more likely to happen, dovish or hawkish statement? In reality, the number of negative economy data in advance of this month's meeting is more numerous than the preceding FOMC last month.

 

USD Long Position Is Decreasing

Recent US data showed slowdown in the job market, stagnation on wage growth, declining inflation rate, and weakening on housing, service, and manufacturing sectors. Still in the same period, trade balance deficit widened while consumer and business confidence seemed unconvincing. Inflation outlook is not any better, since it is shadowed by cheap oil price. From the global scope, PBoC's rate cut and ECB's green light to add more stimulus also put more weights on Fed's shoulders.

With this kind of condition, there is no incentive for Fed to alter its post-meeting statement to be more dovish or hawkish. In connection with that circumstances, Kathy Lien of BK Asset Management emphasized on her note that More US dollar traders are positioned for a nonevent than a disappointment.

If we take a look on market sentiment report released by CFTC, the Commitment of Traders (COT), there is a noticeable decrease in demands for USD.

commitment

COT measures net long and short positions opened by speculative and commercial traders, thus made it into a fairly reliable measure to identify the direction of market sentiment. The latest release from this valuable data that reflected  traders' positions per October 20th indicated surplus net positions for Pound, CHF, and NZD against USD (long positions outnumber the short ones). Meanwhile, Euro and Yen short positions were reported to be significantly down (accumulated before ECB announcement). AUD is the only currency whose short positions against the Greenback are still increasing.

Furthermore, it is important to note that there will be a series of US economy data release this week. Two of them: Q3 GDP published in Thursday and PCE Deflator in Friday are forecasted to have a big impact in the market. PCE Deflator is well-known as the main inflation reference watched by the Fed in their decision making process. From the global front, major data to watch includes RBNZ and BoJ interest rate decision, Eurozone CPI, and China fifth plenum.