The FOMC signaled last week that they are ready to begin ‘tapering’, removing the stimulus aimed at offsetting the pandemic economic slowdown. Fed Chairman Powell commented that the tapering announcement could happen at November’s meeting and that it could be completed ‘sometime around the middle of next year.’ A recap of the primary market movements since last week’s FOMC policy decision and Fed Chairman Powell’s post-decision statement:
· U.S. dollar index is higher with support now at 93.000 and resistance at 93.500. The weekly chart suggests dollar bulls are positioning for a move higher. The dollar is stronger vs. all the major currencies, the biggest gains vs. emerging market and commodity pairings: +2.17% vs. ZAR, +0.89% vs. NZD, +0.85% vs. BRL, & + 0.72% vs. SEK. More modest gains are +0.51% vs. JPY, +0.39% vs. MXN, +0.38% vs. AUD & CHF, +0.34% vs. EUR, +0.11% vs. GBP, and +0.08% vs. CAD.
· U.S treasury yields are higher across all tenors. The 5-year yield is traded as high as 0.993% today, the highest yield since February 2020. The benchmark 10-year yield crossed above 1.400% on Thursday and has traded as high as 1.513% today, its highest since June 29th.
· The major U.S. equity indexes have rebounded from the monthly lows, now having recovered about half of the early September selloff. The equity volatility index (VIX) has retreated from last week’s high at 28.79 and now trades at 18.95.
· Commodities are higher with the Bloomberg Commodity Index currently trading at 100.40, its highest level since July of 2015.
This is a busy week for Fed officials - Fed Chairman Powell is scheduled to testify before Congress on Tuesday and Wednesday. And Fed members Bowman, Williams, Bostic, and Evans will all deliver scheduled speeches throughout the week.
The U.S. dollar index is unchanged today, continuing the week’s tight trading ranges and little net move. The dollar has been sidelined ahead of today’s FOMC rate announcement. While no change is expected to the policy rate, the Fed will likely offer a stronger signal on the timeline for reducing economic stimulus (a.k.a. tapering), but still fall short of a firm announcement.
This week’s low dollar volatility lines up with the narrow ranges seen in U.S. treasury yields which have been uncharacteristically quiet, rangebound since mid-August. The usual dollar and treasury pre-positioning ahead of a rate announcement is not evident with today’s Fed announcement.
This week’s subdued FX market is a stark contrast with the volatility seen in the equity markets. The equity volatility index (VIX) touched a 4-month high on Monday, sparked by the potential default of China’s Evergrande Group, possibly the first major failure from the real estate boom which has been fueled by an unprecedented era of low rates.
Today’s FOMC rate announcement is scheduled for 2pm ET.
The U.S. dollar has retreated from yesterday’s intraday high of 93.453, currently -0.15% at 93.135. Yesterday’s high closely matches the March 31st high of 93.437 and in proximity of the August 20th high of 93.729. A weekly close above 94.000 would suggest a possible try to 96.000.
Today’s primary dollar losses are -0.59% vs. NOK, -0.43% vs. CHF, -0.20% vs. CAD, -0.19% vs. MXN, and -0.10% vs. JPY. Dollar gains are +0.08% vs. AUD and +0.04% vs. NZD.
Markets are rebounding from yesterday’s selloff, led by the major equity indexes which are higher by an average of >1% in Europe and U.S. equity futures signaling a strong open this morning. The S&P500 equity index was -2.87% at one point during yesterday’s trading session but managed to close with ‘only’ a 1.70% loss. The S&P500 is now 4.14% below its September 2nd all-time high; not in correction territory yet (defined as loss of greater than 10%) but yesterday’s low was more than halfway to a correction, -5.28%.
Canadian PM Trudeau survived yesterday’s snap election, winning his third term but failing to regain his majority and losing the popular vote. Trudeau had hoped to cash in on his favorable handling of the Covid-19 crisis to form a majority government. But the snap election was a miscalculation that nearly cost him his job. The Canadian dollar is marginally higher today, +0.19% vs. the USD.
The FOMC begins its two-day policy meeting today, with the world now watching how it will attempt to strike a balance between reducing economic stimulus while not exacerbating global risks (i.e. China’s Evergrande Group potential collapse).
News out of China is moving markets again, but this time it’s not the origins of Covid-19, the crackdown on China’s tech sector, or the erosion of democracy in Hong Kong. Today’s worry is about China’s real estate industry, and more specifically about Evergrande Group, the real estate development firm structured like a Ponzi scheme, now with 800 unfinished major projects and $300bio in debt. Evergrande’s looming collapse has been on the market’s radar for some time now and had been considered ‘contained’ to regional impact. That changed today with investors now weighing the possibility of Evergrande becoming the black swan event of the low-rate era, a collapse that could ripple through the global economy in a domino effect of failed major investors. Evergrande has a $83.5mio interest payment due on September 23rd and a $42.5mio payment due on September 29th. Failure of these payments will put Evergrande in default.
Today’s markets are clearly ‘risk-off’, translated as a higher USD, CHF, & JPY, and sharply lower equities.
The U.S. dollar index is higher by 0.16% today. The dollar’s primary gains:
+0.64% vs. MXN
+0.58% vs. CAD
+0.47% vs. GBP
+0.40% vs. AUD
+0.09% vs. EUR
The FOMC starts its two-day policy
meeting tomorrow and will now have to grapple with the potential Evergrande
collapse, trying to strike a balance between the need to remove economic
stimulus (taper) while trying not to exacerbate what could be a significant
Treasury yields are lower, a hint
suggesting investors expect the FOMC will find it necessary to delay tapering
The equity volatility index (VIX) is
trading at 4-month highs after gapping higher at todays open. The VIX closed
Friday at 20.81 and opened today at 24.25.
Today is Canada's general election. Results could take several days to finalize due to the candidates being in a virtual tie in pre-polling.
The U.S. dollar index is unchanged today and maintains a gain of 0.39% for the week. The dollar’s results are a mix of small gains and losses vs. the majors in narrow overnight ranges, with gains concentrated vs. SEK (+0.27%), JPY (+0.25%), and NZD (+0.24%).
U.S. treasury yields are higher for the 3rd consecutive day, having now gone from the 3-week range lows on Wednesday to the range highs today. The 10-year note yield is trading at 1.372%, up from Wednesday’s 1.263%. A quietly higher dollar and a string of yield gains suggests position adjustments ahead of next week’s flurry of central bank activity.
The FOMC begins meetings next Tuesday and will announce its rate decision on Wednesday (Sept 22nd) at 12pm ET. No change is expected to the policy rate but the Fed may firm up its timeline for the gradual reduction of stimulus (tapering anyone?). The Bank of England will also announce its rate policy next week (Wednesday), with its 8-member committee currently evenly split on whether conditions are right to begin tightening. The SNB, Riksbank, and Norges Bank also hold policy meeting next week.
Canada’s snap election on Monday shows PM Trudeau in a dead heat with the Conservative challenger O’Toole. But as O’Toole is seen as a ‘progressive conservative’, a PM O’Toole leadership would look a lot like the Trudeau government, substituting Trudeau’s privileged and entitled air with O’Toole’s Boy-Scout style. The Canadian dollar is set to close the week with its second consecutive loss.
The U.S. dollar has rebounded today from losses earlier in the week. The U.S. dollar index is higher by 0.28% and approaching recent resistance near 93.000. The greenback is higher vs. all G10 currencies in a reversal of yesterday’s wholesale drop vs. the G10. The dollar’s widest gain is +0.73% vs. the Swiss franc (CHF) which has declined vs. all G10 currencies. A shift away from CHF and a lower JPY normally signal a shift to risk assets but the narrative doesn’t fit today given lower equities in Asia.
The stronger dollar is consistent with today’s higher U.S treasury yields. The 10-year yield found strong support at yesterday’s multi-week low and is back to trading within the familiar 1.260%-1.380% range.
+0.73% vs. CHF
+0.72% vs. SEK
+0.54% vs. EUR
+0.53% vs DKK
+0.49% vs. NOK
+0.38% vs. AUD
+0.29% vs. JPY
+0.27% vs. GBP
+0.20% vs. NZD
+0.14% vs. MXN
+0.12% vs. CAD
AUDUSD reached a fresh multi-week low today and support at
0.7300 is limiting further losses for the time being. A daily close below
0.7285 will likely signal a try lower to 0.7225.
Crude oil prices have retreated 0.66% from yesterday’s close which is weighing on the commodity currencies.
Tuesday’s CPI data (where consumer inflation showed the first decline in 7 months) is all but forgotten with today’s surprise Retail Sales numbers for August, +0.7% vs. the -0.7% estimate. Missing the estimate is one thing but missing the direction by a wide margin underscores the volatile economic rebound from Covid.
The Philadelphia Fed Business Outlook also outperformed at 30.7 vs. the 19.0 estimate. Surging regional manufacturing activity, combined with runaway Retail Sales, puts the Fed’s year-end taper timeline back into play.
Yesterday’s weaker-than-expected CPI reading on inflation continues to weigh on the dollar, leading to a 0.20% drop in the U.S. dollar index. Despite the drop the DXY remains above the 92.322 1-week low, perhaps signaling that the lower CPI has not derailed expectations for Fed tapering later this year.
There is a risk-off tone to today’s trading, most evident in a stronger Japanese yen which has gained against nine of the G10 currency pairings. The JPY’s primary gains are +0.35% vs. NZD, +0.32% vs. USD & AUD.
The shift to JPY strength has come at the expense of the USD which is lower vs. all G10 currencies, the biggest declines -0.64% vs. NOK, -0.33% vs. SEK, -0.32% vs. JPY, and -0.28% vs. CHF.
USDCAD found strong buying at yesterday’s lows near 1.2600. Weakness in the CAD will likely continue leading up to next week’s election which has turned into a surprisingly tight battle for PM Trudeau. CPI data for Canada was reported today +4.1%, above the +3.9% estimate, and the highest reading since March of 2003. Affordability is one of the primary campaign issues so today’s report comes at an unfortunate time for Trudeau.
U.S. Treasury yields are mixed today, higher in the mid-tenors, but lower in the long-dated 15yr-30yr tenors. The 10-year treasury yield declined yesterday but found support near the 3-week range lows, limited damage like that seen in the USD. Markets are signaling that lower consumer prices have not translated into a wholesale shift in the Fed’s timeline.
Equities closed lower yesterday leading to a 0.57% decline in the S&P500 index and its 6th consecutive daily decline. Yesterday’s drop was limited to medium-term trendline support at 4,435.00.
Crude oil has resumed its trend higher, gaining 2.07% today to $72.48/bbl, a 42-day high.
U.S. Core CPI increased by 0.3%, below the +0.4% estimate, and is the lowest consumer inflation reading since February. And when excluding food and energy prices, CPI increased by 0.1% (+0.3% estimate).
The first signs of lower and declining inflation supports Fed Chairman Powell’s “transitory” thesis, the idea that this year’s inflation uptrend (prior to today’s CPI data) was tied to temporary covid-related supply issues and stimulus-fueled demand.
The U.S. dollar index is lower by 0.28% following the CPI release, but still within the week’s ranges above support at 92.000. The dollar is lower vs. most major currencies: -0.62% vs. NOK, -0.49% vs. GBP, -0.48% vs. SEK, -0.39% vs. NZD, -0.31% vs. CAD, -0.28% vs. CHF, and sub-0.25% declines vs. DKK, EUR, JPY, and MXN.
U.S. Treasury yields have moved lower, following the logic that lower inflation will prolong the Fed’s pause before reducing stimulus programs and raising the official interest rate. The 4yr-15yr tenors are showing the biggest yield declines, but all remain within recent (1-week) ranges, so not signaling a major shift in the near-term outlook.
Equities have opened higher on renewed optimism that the Fed remains on hold.
CPI for the U.K. and Canada are set for release tomorrow.
The U.S. dollar index (DXY) has started the week higher +0.23% at 92.793, building on last week’s 0.82% gain. The DXY remains within a long-term sideways range, bounded by resistance at 94.000 and support near 90.000.
The dollar’s primary gains vs. the G10 are +0.57% vs. CHF, +0.27% vs. EUR, +0.24% vs. DKK. Dollar losses are concentrated vs. the commodity currencies, helped by higher oil and industrial metals prices: -0.29% vs. NOK, -0.16% vs. MXN, -0.14% vs. CAD, and -0.10% vs. AUD.
Crude oil reached a 6-week high today at $70.78, but has now settled below $70.50 resistance, +0.92% currently.
The Canadian dollar is becoming more volatile as the September 20th election draws closer. Last Friday’s surprise gain in Net Change in Employment (+90.2k vs. 68.2k estimate) initially led to a powerful CAD daily gain of 0.66%. But reports showing PM Trudeau’s vulnerability in the upcoming election outweighed the employment data and the CAD’s gains evaporated by the end of trading, leaving the CAD with a daily loss of 0.21%.
Treasury yields are slightly lower leading up tomorrow’s CPI (inflation) data release. The headline monthly CPI is forecast to increase by 0.4%, but the reality is that markets have become desensitized to higher inflation; it’s an inescapable reality that doesn’t take official reports to confirm. So while the CPI figures will receive their due attention, the real focus is on the labor market.
*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.