We talked about emerging market risks yesterday and the sell-off in EM currencies seen so far this month, with the Russian rouble leading the way. This continued yesterday, with shortages of foreign currency, primarily US dollars, which prompted the Russian central bank to offer FX swaps with the aim of improving dollar liquidity. This pushed the US dollar lower and some of the majors to reverse some of the recent weakness which has been seen on the majors. More notably, cable is near the 1.63 level as the latest polls have given a narrow lead to the ‘no’ side last night. Scotland enters the last day of campaigning before the independence referendum tomorrow, with results expected to be known by the start of European trading on Friday. Sterling volatility is assured whilst the vote remains too close to call.
Before then, the US Federal Reserve announcement comes this evening. The momentum behind tapering is expected to continue, but the main focus is on the language and the scope for an adjustment to water-down or remove the pledge to keep rates at their current target level “for a considerable time” after the asset purchase program ends. With this expected to happen next month, then some are thinking that the language is incompatible with a Fed tightening rates around the middle of next year. The dollar is going to be sensitive to any change in language, which would give it a further lift, especially vs. the EUR where the policy parameters continue to push in the opposite direction.