Posted on: 19 Sep, 2019
The Fed cut rates by 25bp to provide “insurance against the external risks” in the words of Chairman Powell, but didn’t sound committed to extend its rate-cutting campaign any further at this stage. It therefore was characterized by most analysts as a hawkish cut, since it did effectively lower the benchmark rate range but the statement contained hawkish connotations.
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The USD is trading higher as the FOMC validates my assumption of improving US economic data coupled with a tentative US-China trade truce in Oct acting as sufficiently convincing arguments to take the foot off the pedal, in other words, no longer committing/hinting to further rate cuts this year. This makes the disconnect between the median dots plot and the market expectations rather pronounced, with one more rate cut fully priced by the end of 2019 with the disparity only widening into 2020 and beyond. The JPY joins the USD as one of the main beneficiaries of the post FOMC contained volatility we've seen, with all eyes on the BOJ presser by Kuroda after an unchanged policy decision today. The GBP also continues its ascend, really defying gravity here as the market keeps pricing out the risks of a disorderly Brexit. The EUR and CHF had a mixed-bag day. The main losers include the AUD, knocked down after a poor reading in the Australian employment report (RBA rate cut calls on the rise), the NZD has also been trading on the back foot with the market not buying into a modest recovery in the NZ GDP release a few hours ago, while the CAD is also a tad lower, mainly dragged by lower Oil prices.
The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Fed goes for a hawkish-type cut: The Fed cut rates by 25bp to provide “insurance against the external risks” in the words of Chairman Powell, but didn’t sound committed to extend its rate-cutting campaign any further at this stage. It therefore was characterized by most analysts as a hawkish cut, since it did effectively lower the benchmark rate range but the statement contained hawkish connotations.
Disconnect between dots plot & market expectations: The 2019 dots plot chart suggests the Fed is comfortable being sidelined without the need for further rate cuts this year, which is still in disconnect with the 100% odds the market is discounting for another rate cut before the turn of the year. The median consensus by the Fed, as depicted by the dots plot, sees the Fed Funds rate at the current level until the end of 2020, followed by a modest tightening in 2021. However, under the market perspective, 2020 still carries the risk of 62bp worth of cuts to the fed funds rate, with this mismatch only expanding to as much as 90bp or almost 4 rate cuts vs the Fed median forecast in 2021. It’s also worth noting the significant disparity in the dots plot, which implies growing opposing views by Fed members.
Powell ready to adapt as needed along the way: But as usual, during the press conference, Chairman Powell didn’t close the door to make further adjustments on the go if the conditions do require to do so, even if the base case is anchored around a constructive view towards the economic outlook, predicated on the fact that the economic projections were barely revised, coupled with recently solid US data. Chair Powell’s stressed that if “the economy weakens, more extensive cuts may be needed.”
All options on the table going forward: The ambiguity of the message the Fed intends to portray in order to keep a fair share of leverage and don’t rule out any options down the road was clearly manifested in one of the paragraphs of the statement -> “ The Committee views a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective as the most likely outcomes”, while highlighting that this view does risk being altered as “uncertainties” remain due to trade wars and low inflation.
IOER cut to stabilize effective Fed Funds: After the drama in the USD funding market, the Fed also lowered the excess reserve rate (IOER) by 30bps to 1.80% in order to stabilize the effective Fed Funds rate in its predetermined range. This move will help to subdue volatility in the USD money markets near term one would think.
Data dependency critical from now on: During the press conference, what was most revealing about the Fed’s stance and more specifically, Powell’s position at this point in time, was that this easing period is still considered to be as part of a mid-cycle policy adjustment but conditional to the economy staying on course, or else more rate cuts will be warranted. When asked the specific question of whether or not the FOMC still had an easing bias, Powell said, “We don't”, noting it will be data dependent.
Trump keeps attacking Powell over and over... After the press conference, Trump referred to Powell as someone with no guts, no sense, no vision, adding that he is a terrible communicator! Do not forget, as the Presidential race in 2020 looms near, Trump will do whatever he can within his power to keep the economy afloat, which means the more accommodation monetary policy is, the better…
Oil keeps retracing over sized gains as Geo-risks decrease: On the geopolitical front, a contentious topic to monitor is whether or not military action will be needed to counter-attack the aggression that Saudi Arabia suffered in its oil facilities. On Trump's camp, he will stay away from engaging in any conflict for now, noting instead he has instructed the Treasury to substantially increase Iran sanctions. The announcement is an Oil negative as it reduced the risk premium on less likelihood of a war. It remains to be seen whether or not Saudi Arabia will strike back as a retaliation.
Canadian CPI bang on expectations: Canada’s August CPI came in line with expectations at +1.9% y/y. By analyzing the sub-components of the report, with gasoline a key drag even if all signs point to a rebound in inflation in the months to come after the spike in Crude Oil we’ve seen recently.
The Australian jobs disappoint, RBA rate cut looms: The employment change came at a decent +34.7K vs 15K expected, but that was about it. From there, it went downhill with the unemployment rate missing expectations at 5.3% vs 5.2% exp, but even worse, the full time employment change was -15.5K, with part-time taking up the slack with a gain of+50.2K. The participation rate stood at a record high of 66.2%, which was a strong number to offset a bit the negative results.
The NZ GDP cements RBNZ rate cut calls: Analysts are looking for further rate cuts by the RBNZ after the modest recovery in NZ GDP for Q2. According to ASB, "growth in New Zealand remained uneven, with the services sector and agriculture keeping the economy afloat. This period of sluggish performance is set to continue, and we expect growing spare capacity will see the RBNZ cut the OCR again in November."
The EUR index keeps pressing into higher territory in the early hours of Thursday in Asia, with the overall technical stance certainly more constructive. The index trades comfortably above its 13d ema (baseline) with both the fisher transform and the CCI as the key indicator to guide us as a backing in assessing the structure of the market having turned bullish. However, the index is facing a key supply level overhead (already rejected twice) in the form of the origin of a major supply imbalance back in August 30th. Note, the more tests of the level, the more buyers will be absorbing the sitting offers in EUR pairs, with this upcoming 3rd test potentially being the one that may see an eventual breakout, in which case, there is over 0.6% of average gains EUR buyers may capitalize on as we move into the last week of September.
The GBP index has overshot the 100% proj target but the failure to sustain gains above the critical reversal area does still validate the technical rationale for a market that is looking awfully expensive in the very short term. As I’ve warned, it does take some guts to take the plunge and keep buying the Sterling at these hefty prices unless you are deploying some type of momentum strategy that gets you in and out of the market for quick scalps or intraday swings. The tapering of aggregate tick volume into the 100% proj target reinforces this notion of the risky nature of buying the Pounds at these levels as the appeal to load longs diminishes. Gravity continues to be defied but make no mistake, these are not healthy levels to gain mid-term long exposure.
The USD index has confirmed a technical bullish breakout with the suite of indicators (fisher and CCI) confirming the conducive structure of the market as viable to engage in longs. The aggregate tick volume is not high enough for my likes to be fully committed but let’s face it, the market had marked time ahead of the end of day FOMC, which is why there will always be lighter tick volume. That said, the close near the highs of the day is a testament that the market is finding acceptance above a critical level of resistance, setting up the stage for the index to be, sooner or later, en route to retests its trend highs. This views marries well with the rather bullish outcome from the FOMC as no hints were given for further rate cuts this year.
The CAD index continues to look rather bearish for the next 24h as buyers failed to break and hold above the 13d ema (baseline) as Oil keeps giving back gains as there seems to be no signs of an immediate strike against Iran by Saudi Arabia in retaliation for the attacks. The index shows the suite of indicators (fisher and CCI) in bearish territory, confirming the rather gloomy technical picture. The index now faces over 0.3% of potential room before the next support.
The NZD index is unambiguously bearish but note that a level of support has now been reached where buyers showed up with impetus the last time. As I stressed in yesterday’s note, it will be critical to now judge the strength of sellers to find acceptance into fresh yearly lows. There is 0 technical evidence to be a buyer of the NZD until the index tests the next support level. If you are a reversal to the mean type of trader, there is always some merit in buying off support as would be the case here in the NZD should one’s system trigger an entry, just beware the trade would certainly be a rather risky proposition judging by the bearish context.
The AUD index keeps rolling over from its level of macro resistance, not only retesting the baseline, but now convincingly broken after a miss in the Australian jobs number. What this means is that the RBA may have to flex its muscle with another near-term rate cut, which would be very much in line with the more dovish RBA minutes outcome from Tuesday. It’d give the Aussie another 0.3% worth of declines before it encounters major buying interest at the next macro support level as per the multiple rejections it experienced through Aug highs.
The JPY index has found buying interest after the FOMC but so far continues to experience difficulties to chew through a key confluent level of resistance which aligns with a previous swing low in the index alongside a retest of the daily baseline. What this means is that the outlook remains bearish in the daily, with the CCI still well below the 0 level, which essentially communicates that the average price in the last 20 candles is still negative, indirectly revealing that the structure of this market remains firmly anchored towards bearish tendencies. Note, this would potentially be a meaningful reversal point to bid up the JPY as it occurs at a critical location (retests of the previous swing high from mid June). The BoJ is out today.
The CHF index remains vulnerable to further downside pressure judging by the location in the chart, which unlike the pricing of the JPY index, is yet to reach an area that I’d consider significant enough for buyers to return. We are not far though, by my calculations, an additional loss of value to the tune of 0.3% on aggregate vs G8 FX (represented by the index) is what’s left in terms of technical room before the 100% proj target is met, which will be a time to re-evaluate the prospects in the CHF. We have the SNB policy meeting today, don’t forget.
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