Head of FX Strategy
Summary: The market reaction to the FOMC meeting and Powell press conference suggest that the market puts little faith in their policy guidance and is happy to assume that the Fed will provide the necessary easing from here to keep the party going. The US dollar was sharply lower after the FOMC meeting, especially versus riskier currencies.
A curious FOMC meeting yesterday, as the statement and the Powell press conference were objectively a “hawkish cut”, in that the Fed is reluctant to signal any further easing for now unless incoming data clearly points to a slowdown. It was surprising in the press conference to see how much faith Chair Powell is putting in the prospects for a “phase one” US-China trade deal and in hopes that the Brexit situation will resolve itself. One wonders if Powell and company have their eye on bulled-up equity markets and simply wanted to bring everything they could to the table to argue against any further signaling on easing – fearing asset market destabilization via a melt-up scenario.
In reaction to the press conference as it unfolded, the USD tried to put in a rally as it was clear that Powell wanted to guide for a hold now on the policy rate, even if this was hinging on incoming data, but judging from the action in futures pricing in Fed probabilities for coming Fed meetings, there was no conclusion drawn or notable shift in the odds for policy moves at coming meetings (market leaning on no further cuts and not getting to 50/50 odds of another cut until around March next year) Interestingly, even as long US yields fell yesterday, the strength in the bond market was not a safe haven bid, and equities put in a very strong session, with the market closing at a new all-time high. The US dollar was heavily lower, particularly against smaller currencies. Now the interest will be in how the market treats incoming US data – especially weak data and whether this is seen as cause for concern on risk sentiment (more favouring USD lower versus, for example, the JPY) or if the implications for further Fed easing are instead celebrated.
US Secretary of Treasury Mnuchin said yesterday that the US is looking into issuing 20- and 50-year bonds for the first time.
The Canadian dollar not participating in the celebration of US dollar weakness as the Bank of Canada statement yesterday offered up a much more cautious tone and fretted that the Canada’s economic resilience could be sorely tested in the months ahead and cut its growth outlook for 2020. Governor Poloz indicated that a rate cut was considered at the meeting, but rejected. CAD crosses were absolutely shredded as the market was caught offside – have a look at NZDCAD , for example, suggesting that there was a stale and extended positioning in CAD that didn’t appreciate the surprise. Canadian short rates were marked down sharply as the market priced in higher odds of a cut at one of the coming meetings.
The BoJ overnight was hardly noticed, as the Bank kept policy unchanged and merely removed specific guidance on the timing of its current policy mix (from 2020 to “as long as necessary”).
Chart: AUDUSD
AUDUSD exploded up through resistance in the wake of the FOMC meeting and is now testing the massive descending channel that has defined the price action since well back into 2018. Achieving a move through 0.7000 begins to break the chart formation and suggests higher levels still, even if we don’t believe Australia has faced its worst risks for the cycle. We’re open minded for the risk of a decent rally here on USD weakness, but not ready to get enthusiastic on the longer term prospects for the Aussie.
The G-10 rundown
USD – the USD looks down and could be soon out as levels are beginning to fall across the board as long as the market it comfortable that it is getting what it wants from the Fed in providing easing and liquidity.
EUR – incoming ECB president Lagarde is already out singling out Netherlands and Germany for doing more on the fiscal side and saying that negative rates are under review for both positive and negative effects. EURUSD pulling higher and threatening bigger chart levels, starting with 1.1210.
JPY – the Bank of Japan provided zero drama as the bank kept its current levels of stimulus unchanged and dropped the language on timing – supposedly a “lower for longer” guidance, but market shrugs this off. Rally at US long end supports USDJPY lower, but JPY indifferent to weak in other crosses on strong appetite.
CHF – perhaps the drop in yields keeping a lid on EURCHF, but interesting that Lagarde comments on fiscal and strong risk appetite haven’t done more to weaken the franc. Where is the pulse?
GBP – sterling is looking passive here to broader developments as the market will have several weeks now to watch the ups and downs in polls and consider the complexity of possible election outcomes for Johnson’s efforts to increase his mandate.
AUD – A very strong performer overnight on the reaction pattern to the FOMC and challenging big levels, as we discuss above. Longer term concerns linger once this bout of risk enthusiasm fades – note the private sector credit growth notched another multi-year low overnight at a meagre 2.7% YoY.
CAD – the loonie sitting out the USD bashing party as the Bank of Canada waxes dovish on concerns for the outlook, punching Canadian short yields sharply lower.
NZD – an even stronger performer than AUD overnight. A very interesting level coming up in NZDUSD that looks like the neckline of a well-organized head and shoulders formation.
SEK – EURSEK has turned back lower finally after testing important resistance into 10.80+ Last chance for the SEK bulls to get something going tactically here.
NOK – A classic momentum divergence setup in EURNOK as the latest highs come with lower momentum readings, encouraging bears further on a close below perhaps 10.20.
Upcoming Economic Calendar Highlights (all times GMT)
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
