Fed Cuts, Powell's Optimism Drives Risk On Rally
The Federal Reserve lowered interest rates for the third time this year by 25bp. While the move was widely expected, it triggered a small expansion in FX volatility. USD/JPY surged above 109 to a high of 109.28 before u-turning lower while EUR/USD dropped to 1.1080 and then rebounded above 1.1140. Fed Chairman Powell made it clear that today's move was an insurance cut aimed at offsetting risks of softer global growth and uncertain trade developments. Despite the decision to ease today, the FOMC statement and Powell's comments were laced with optimism. The Fed expects the economy to continue to grow at a moderate rate as they see a strong labor market and consumption. Their worries center on investment and exports but with Brexit and trade risks easing, they "believe monetary policy is in a good place." All of this tells us that the Fed is done for the year and has no intention of lowering rates further. In fact Powell said point blank, "we're not thinking about raising rates right now." Yet the dollar failed to hold onto its gains as today's move turned out more positive for risk than for the greenback. This could be tied to Powell's warning that General Motors strike could cut growth by a couple tenths this quarter or worries about Apple earnings. Investors may also be refraining from major positions ahead of Friday's non-farm payrolls report. Regardless of the motivation, we don't expect further cuts from the Fed this year so the dollar should start to trend higher.
Meanwhile the Bank of Canada set a bottom in USD/CAD with their monetary policy statement. The BoC's decision to leave interest rates unchanged was widely anticipated but instead of emphasizing the strength of the labor market and the positive outlook for the economy, the central bank said the "resilience of Canada's economy, will be increasingly tested." They saw the outlook weakening since July with trade conflicts likely to cause business investments and exports to shrink in the second half of the year. Canada's not immune to the global developments and could slow below potential in H2. Although they raised their 2019 GDP forecast, they cut their Q3 forecast and lowered their growth projections for 2020 and 2021. According to Governor Poloz the central bank considered whether the downside risks warranted stimulus and they felt that at this time it did not. While these cautionary comments drove USD/CAD straight to resistance at the 20-day SMA near 1.3180, we expect further weakness in the loonie particularly against the euro, US and Australian dollars. Today's move should mark the beginning of broader profit taking on long Canadian dollar trades.
The Australian and New Zealand dollars traded higher on the back of risk appetite. Data from Australia was also good with price pressures rising slightly in the third quarter. On a quarterly basis, CPI rose 0.5%, which was in line with expectations and this helped to boost year over year growth to 1.7% from 1.6%. On Monday night, Reserve Bank of Australia Governor Lowe said they are prepared to ease policy further if needed but rate cuts are having a "positive effect" on the economy and we believe that the chance of another move this year is slim. The focus shifts to the New Zealand dollar, which has been an underdog tonight. Building permits and business confidence numbers are scheduled for release. NZD data has been mostly soft and if this trend continues, we could see AUD/NZD hit fresh year to date highs.
Both currencies remain in play tonight with Chinese PMIIs scheduled for release. Chile also canceled their APEC summit next month amid unrest and protests. According to President Trump, the time frame for finalizing the deal remains the same. China suggested that President Xi meet with President Trump in Macau and we are still waiting to see if the US agrees. At the same time, the deal is still being negotiated, is in the process of being written and could fall apart at any time. According to Treasury Secretary Steven Mnuchin, it will take time for China to "scale up" to the $40 billion to $50 billion in annual agricultural purchases promised by Trump.
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