Disappointing ISM data released yesterday has fueled expectations for a rate cut at the FOMC’s next policy announcement on October 30th. The probability for a rate cut now stands at 69.8% compared to a week ago when it was only 51.7%. The prospect of a lower return for holding dollars spurred dollar selling yesterday and continues to weigh on the dollar today.
Yesterday the U.S. Dollar Index traded as high as 99.667, tantalizingly close to the psychological 100 level, but has since dropped 0.50% to 99.171.
Central banks globally have almost universally adopted an easing stance (rate cuts) this year as there have been a total of 97 cuts and only 17 hikes year-to-date. August alone saw 22 cuts and 0 hikes.
The dollar’s biggest decline today vs. the majors is against the JPY at -0.34%, followed closely by a 0.31% drop against the ZAR, and smaller losses against the DKK, EUR and NZD. The dollar has gained on the CHF (+0.57%), CAD (+0.43%), and a string of insignificant gains against the SEK, NOK, AUD, and GBP.
ADP Employment data released today came in at +135K, below the expected +140K. Perhaps more important is that last month’s reported +197K was revised down to +157K, a significant downward revision. All eyes now turn to Friday’s Employment Situation Report where Nonfarm payrolls are expected to increase by 147K.
EURUSD: Continues to trade in a well-defined downtrend, starting February of 2018 high of 1.2555 to September’s low of 1.0883, or a decline of 13.32%. A dovish ECB, an uninterrupted string disappointing economic Eurozone data, and declining sentiment will continue to pressure the EUR.
1.1000, 1.1025, 1.0964
The U.S. Dollar Index closed out Q3 with a gain of 3.38% and for September was up 0.47%. The dollar has gained 12.41% in a string of modest monthly gains since the February 2018 low of 88.253. The dollar’s strengthening trend remains intact as it approaches resistance at 100.00 and higher at 102.25.
After some seesaw action driven by surprise headlines (drone attack on Saudi oil fields, Trump impeachment process, UK Supreme Court ruling against PM Johnson, fresh trade tensions between the U.S. and China) the market ultimately decided that the global environment still favored a ‘risk on’ approach. For September the Russian ruble closed with a gain of 2.95% vs. the dollar and the Mexican peso closed higher by 1.67%. Conversely the ‘safety’ currency Swiss franc closed lower by 0.73% against the dollar and the Japanese yen dropped 1.67%.
Now that we have reached October the market’s focus turns to the UK’s Brexit deadline on the 31st. As if on cue Pound sterling intraday volatility is higher today (17.23) as the GBPUSD first declined 0.88%, quickly followed by a gain of 1.11%, then another loss of 0.65%. Support is at 1.2200 and lower at 1.2025. Resistance is seen at 1.2350.
The U.S. dollar is stronger today against the full lineup of major currencies in the aftermath of increased global political uncertainty. Yesterday’s ruling against Prime Minister Johnson by the U.K. Supreme Court was compounded by the announcement of impeachment proceedings against President Trump by U.S. House speaker Pelosi.
Granted it was an historic day so market reaction by adjusting positions is a normal response. If nothing else the shift in foreign exchange prices overnight makes it clear that the U.S. dollar is the ultimate ‘risk off’ currency. Regularly we see the CHF and JPY benefit from global flareups but today even those currencies saw declines. The overnight performance of G10 pairings vs. the USD: GBP -0.77%, AUD -0.59%, NZD -0.55%, SEK -0.52%, JPY -0.39%, EUR -0.31%, DKK -0.30%, NOK -0.27%, CAD -0.20% and CHF -0.15%.
Data on U.S. new home sales for August will be released later this morning with the market estimating an increase of 659K. Last month’s report showed an increase of 635K so optimism in the housing sector continues to grow. And yesterday Consumer Confidence was reported at 125.10, below the market expectation of 133.00.
The U.S. dollar is broadly weaker this morning with the GBP gaining the most ground (+0.36% vs. the dollar) after the U.K. Supreme Court announced its ruling that PM Johnson’s suspension of Parliament earlier this month to be illegal. Today’s ruling was the latest in a series of setbacks for Johnson’s government in its effort to implement Brexit by the October 31 deadline. The pound has now gained as much as 5.22% since the September 3rd low of 1.1957 when Johnson’s government lost control of Parliament’s agenda.
Along with the decline against the GBP, the dollar is also down vs. the AUD (-0.35%), NOK (-0.34%), and NZD (-0.33%).
Eurozone data released yesterday underscored the dimming view of the EU’s manufacturing sector, where nine measures of PMI data for Germany, France and the Eurozone all came in below expectations. The disappointing data has put additional selling pressure on the EUR which touched a multi-year low at 1.0924 earlier this month (September 3rd).
Home price data released earlier today for the U.S. was reported at a 0.4% MoM gain compared to the +0.3% estimate. Lower borrowing rates in the wake of two rate cuts by the U.S. Fed have led to a recent surge in the housing sector with a spike in new permits, increased refinancing activity, and price increases.
The Fed announced a quarter point cut yesterday at the conclusion of its two-day policy meeting. While the cut was expected the vote was not unanimous with three Fed members voting against. The prospect of a divided Fed has lowered the probability of additional cuts this year and spurred a stronger dollar (fewer future rate cuts increases the incentive to hold USD assets). Characterizing yesterday’s rate action as a ‘hawkish cut’ seems appropriate, the Icy-Hot version of the FOMC.
The stronger dollar has led to reduced holdings in the traditional ‘risk’ currencies and weakening the BRL (-0.71%), AUD (-0.38%), SGD (-0.23%), KRW (-0.20%), and NZD (-0.16%). Conversely the CHF (+0.49%) and JPY (+0.42%) are stronger in today’s session as the markets tilt towards safety.
For the third consecutive day the Fed has injected liquidity into the overnight funding market (repo). Funding shortages on Monday and Tuesday for one-day loans backed by treasuries led to a spike in rates to as high as 10%, or four times higher than rates seen just last week. Liquidity operations such as this by the Fed typically occur in periods just prior to a financial crisis. So we will add the repo market volatility to the list of worrying symptoms for the global economy.
BREXIT: Today is the final day of hearings before the U.K. Supreme Court on whether Prime Minister Johnson abused his authority when he suspended Parliament until mid-October. The GBPUSD is trading within an increasingly tighter range leading up to the court’s verdict.
The currency markets have been quiet overnight and early in today’s U.S. trading session ahead of the FOMC’s rate announcement later this afternoon. The Fed is widely expected to cut rates by 25bps, but worth noting that the market has priced in a 17.2% probability of a 50bps cut. The policy announcement is scheduled for 2PM Eastern.
The pound sterling dropped early in the day after EU commission president Juncker stated that ‘the risk of a no-deal is very real’. The pound has strengthened by 4.76% (vs. the USD) since September 3rd when PM Johnson’s government lost control of the Parliamentary agenda. GBPUSD: support 1.2375, resistance 1.2550.
As the U.K.’s new Prime Minister, Boris Johnson’s government has been stymied at every turn in its effort to deliver Brexit by the 31 October 2019 deadline. Below is a recap of the near daily actions by government opposition to prevent a no-deal Brexit following the announcement of Johnson’s suspension of Parliament on 28 August.
· 28 Aug - PM Johnson announces suspension of Parliament for five weeks
· 3 Sept - Tory rebels and opposition MP’s were granted an emergency debate and vote to take control of Parliament’s agenda from Johnson’s government
· 3 Sept - Government opposition wins vote (328-321) to take control of Parliament’s agenda.
o 4 Sept - PM Johnson’s call for snap election is blocked
· 4 Sept - With control of the agenda, Opposition and Conservative MP’s passed a bill (327-299) outlawing a no-deal Brexit
· 6 Sept - Bill outlawing no-deal Brexit wins final approval
· 9 Sept - Motion passed (311-302) ordering Johnson’s government to release internal private communications between the PM’s top advisors about Brexit plans/strategy
· 9 Sept - PM Johnson’s second attempt to trigger snap election is defeated (needed 434, got 293)
· 17 Sept – Three days of scheduled hearings begin at U.K. Supreme Court challenging the legality of Parliament’s suspension by PM Johnson
The FOMC starts its 2-day policy meeting today and is expected to cut the Federal Funds rate by 25 basis points to a target range of 1.75%-2% (from the current 2%-2.25%) at tomorrow’s policy announcement. The probability of a rate cut is firmly at 100%, comprised of a 92.9% chance of a 25bps cut and a 7.1% chance of a 50bps cut.
Economic data released since the Fed’s last policy meeting show developing challenges in the U.S. labor market, most notably in the Nonfarm Payroll report for August which was reported at +130K, well below the estimated +160K. And July’s payroll report was revised to 159K from 164K. The labor market had been the most resilient sector of the slowing economy but is now showing vulnerability.
U.K. Prime Minister Boris Johnson’s suspension of parliament, announced on August 28th, is being challenged today at the U.K.’s Supreme Court. The hearings are scheduled to last three days. If the court determines Johnson overstepped his authority he could be forced to recall Parliament, giving Brexit opponents additional time to maneuver before the October 31st Brexit deadline.
The dollar is mixed today with moderate gains against the CAD, AUD, CHF, MXN, NZD and JPY, but losses against the EUR and GBP.
Oil prices are lower today by 4.82% on reports that Saudi Arabia would soon be able to resume 70% of lost capacity following last week’s drone attack.
The pound sterling continues to rebound from its Brexit crisis low last week when the GBPUSD traded as low as 1.1957 (Tuesday, September 3rd). The combination UK Parliament’s successful vote to assume control of the parliamentary agenda and Prime Minister Johnson’s failure to reach the 2/3 majority needed to initiate an early general election have lessened the likelihood of a no-deal Brexit at the October 31 deadline. Having lost the momentum for a no-deal departure from the EU, PM Johnson has indicated that his government will now work for a revamped deal with the EU, picking up right where former PM May left off before her resignation.
The GBPUSD has broken above short-term trendline resistance at 1.2250 and is now targeting 1.2400 in the near-term and has room to move as high as 1.2550.
As U.S./China trade tensions have subsided the appetite for risk has returned, leading to a stronger ZAR (+2.59%/week), MXN (+2.02%/week), and BRL (+1.04%/week). The ‘safety’ currencies have declined with the JPY -1.26%/week and the CHF -0.36%/week.
Asian currencies have advanced as U.S./China tariff rhetoric has softened the last few days. Over the last week the AUD has gained 1.35%, NZD +1.17%, KRW +1.87%, SGD + 0.72, and TWD +0.66%.
*The arrows indicate how the base currency performed against the counter currency overnight. This document is for information purposes only and does not constitute any recommendation or solicitation to any person to enter into any transaction or adopt any trading strategy, nor does it constitute any prediction of likely future movements in exchange rates or prices or any representation that any such future movements will not exceed those shown on any illustration. All exchange rates and figures appearing are for illustrative purposes only. You are advised to make your own independent judgment with respect to any matter contained herein.