The last full trading week of the month is proving to be nothing if not action packed. Yesterday, it was all about the rouble. Russia’s currency was essentially out of control in the wake of the rate hike, with liquidity also being sucked out of the international markets for the currency. The choice facing the Russian authorities is to either intervene with their substantial foreign exchange reserves, or introduce capital controls. We’ll probably get an idea by the end of this week which way things are likely to fall, if not earlier.
In part, the action on the rouble was causing volatility and erratic moves on other currencies. The yen has seen a sharp reversal from the level prevailing at the start of the month as it has become the safe haven of choice. The NOK was also particularly volatile yesterday, together with sterling. The UK currency will be in focus again today with the release of minutes to the December MPC meeting, together with labour market data. Since August, we’ve seen two members dissenting in favour of higher rates, something which would be surprising for the December meeting. Sterling could well prove to be volatile again on Wednesday given the data and thinning year end volumes.
The main focus will be on the Fed decision this evening. Once again, it’s all about the language and whether the Fed maintains the pledge to keep rates low “for a considerable time” now that QE has ended. The latest changes in oil prices has pushed inflation forecasts lower for next year, with some now seeing annual inflation at zero by the middle of the year. The Fed’s favoured measure of inflation expectations (5Y5Y breakevens) is now at levels last seen more than four years ago. That’s not the backdrop against which to signal that rates may go up soon, even if they are at zero.