Macro: Sandcastle economics
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NY Open: Waiting for the other shoe to drop
Michael O’Neill
FX Trader, Loonieviews.net
Summary: Markets have grown increasingly uneasy in the wake of the latest Fed meeting, the nonfarm payrolls blowout, and yesterday's State of the Union.
Traders have had a lot to worry about since last week, including the Federal Open Market Committee meeting, the nonfarm payrolls report and the State of the Union address. Those shoes have dropped, as have all the G10 major currencies against the US dollar. The only exceptions are the New Zealand dollar, which is unchanged, and the Canadian dollar which scraped out a small gain.
Traders are looking for the next plunging shoe and don’t know if it will be fluffy slipper or a steel-toed work boot.
The Bank of England monetary policy decision and quarterly inflation reports are on deck. Bank of Canada governor Stephen Powell, Federal Reserve chair Jerome Powell, and Reserve Bank of Australia governor Philip Lowe have all flip-flopped on policy statement messages in the past few weeks. It would not be much of a stretch to think that BoE governor Mark Carney follows the same playbook.
Brexit was a significant concern at the December 20 meeting. The statement said “Brexit uncertainties have intensified considerably since the Committee’s last meeting. These uncertainties are weighing on UK financial markets.” It went on to say those concerns were weighing on growth and the currency.
Brexit developments took a turn for the worse since that meeting. UK MPs resoundingly defeated Prime Minister May’s Brexit plan. The new strategy is to renegotiate the deal, something that European Union officials have said isn’t going to happen.
Elevated no-deal Brexit fears may be enough for the BoE to issue a dovish statement and open the door to a rate cut.
Wall Street is following yesterday’s rally with a retreat in early New York trading. President Trump didn’t provide any new information or details on infrastructure spending in the SOTU last night, which may be weighing on equity prices. Traders ignored news that the US monthly trade deficit narrowed to $49.3 billion in November.
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