After tumbling on Wednesday due to comments by Fed Chair Powell, the greenback rebounded against some of the other G10 currencies on Thursday. The Fed minutes confirmed the case for a December hike, but revealed uncertainty with regards to the path of future rate increases. However, the dollar did not slide further. It may have stayed somewhat offered due to its safe-haven status as investors have started turning their gaze to the G20 summit and the meeting between Trump and Jinping.
After suffering massive losses on Wednesday, the dollar managed to recover against some of the other G10 currencies on Thursday, but not all. It staged a decent rebound against SEK, GBP and CHF in that order, while it stayed on the back foot against NOK, EUR and AUD. The greenback ended within a ±0.10 range against JPY and NZD.
On Wednesday, the dollar sank after Fed Chair Jerome Powell said that interest rates “remain just below the broad range of estimates of the level that would be neutral for the economy”. This round of remarks came in contrast with the comments Powell made back in early October. Back then, the Fed chief said that he is very happy with regards to the economic expansion, adding that interest rates are still distant from their neutral level and that the Fed could raise them past that level.
Apart from abandoning the dollar, investors rushed into the equity market on speculation that the Fed is closer (than previously thought) to the point where it may stop or pause its hiking cycle. Indeed, although the market remained overly optimistic that the Fed will proceed with raising rates at the December gathering, it pushed back its expectations with regards to the number of next year’s hikes.
Yesterday, the minutes from the latest FOMC gathering confirmed investors' choice. According to the Fed fund futures, the market assigns an 83 chance for the Fed to push the hiking button in December, but the number of hikes expected in 2019 has now fallen to 1.3. A few weeks ago, that number was around 2. The minutes revealed that almost all members agreed that another rate increase could be warranted “fairly soon”, but a few participants “expressed uncertainty about the timing” of future rate increases. Many participants also argued that it may be more appropriate to change the statement language in a manner that places more emphasis on the evaluation of incoming data.
Speaking about data, yesterday, we also got the core PCE yearly rate, which is the Fed’s favorite inflation gauge. The rate slid to +1.8% yoy in October from a downwardly revised 1.9% yoy in September. This suggests that, at its December meeting, the Fed may soften its inflation language, perhaps noting that inflation is now below its 2% objective, instead of inflation “remains near 2%” as it was noted in the latest statements. At that meeting, investors are also likely to place extra emphasis on the new “dot plot”, and especially the projections for 2019. In September, officials anticipated three hikes for the year, but according to the aforementioned remarks and developments, this now appears a very optimistic scenario.
On the 18th of November, USD/CHF had entered a range between the 0.9920 and 1.0005 levels, indicating that the pair is on-hold for now until the next market-driven event. The only thing that supports the downside a bit more, is the fact that, since the reversal south on the 13th of November, USD/CHF is forming lower highs. Nevertheless, the pair is struggling to make lower lows, hence we will remain neutral for now and wait for a confirmation break through one of the sides of the aforementioned range.
As mentioned above, the pair could stay within the range for quite a bit, until traders decide to drive it out. If eventually the break happens through the lower side of that range, then this might clear the path towards the next potential area of support at 0.9880 zone, which is marked near the inside swing high of the 15th of October and the inside swing low of the 12th of the same month. The zone could hold the rate temporarily, but if the selling momentum continues, the bears could push the pair towards the next possible area of support near 0.9850, marked by the low of the 15th of October.
On the other hand, if USD/CHF breaks above the 1.0005 barrier, which is the upper bound of the previously-mentioned range, the bulls could start getting excited again, as this could increase the chance for the pair to travel higher to test the 1.0035 hurdle. Another break above 1.0035 may lead the rate further up to the 1.0080 obstacle, which acted as a good resistance area on the 16th of November.
We think that the minutes and the slide in the yearly core PCE rate would have kept the dollar under strong selling interest under other circumstances, but the currency may have stayed somewhat offered due to its safe-haven status. Perhaps investors have started turning their gaze to the G20 summit in Buenos Aires, Argentina, where US President Donald Trump is expected to meet his Chinese counterpart on Saturday in order to discuss trade. Market participants will be eager to see whether the two leaders are willing to work in finding common ground over trade, or the dispute between the two nations will escalate further.
As for our view, it has not changed. Developments around the matter still suggest that it would be very hard for an accord to be agreed as early as at this meeting. Last week, the Asia-Pacific Economic Cooperation (APEC) group failed to strike a communique for the first time in its history, due to differences between US and China over trade, while the Trump administration said that China took “further unreasonable actions in recent months” with regards to intellectual property.
Adding to all of this, yesterday, US President Trump tweeted that “there is a long way to go” with regards to tariffs imposed to Chinese imports, and while speaking to reporters before departing for Argentina, he noted “I think we’re very close to doing something with China but I don’t know that I want to do it”. On top of that, reports suggested that Peter Navarro, White House hardline trade advisor, will eventually attend the meeting, making the case for a deal so early less likely, we believe. In our view, the two leaders could just agree to keep the door open for further talks, something that could be mildly positive for the markets we believe.
As we noted several times in the past, among currency pairs, our favorite proxy for playing the trade-war theme is AUD/JPY. Signs that the two nations are willing to work things out are likely to benefit the Aussie, due to Australia’s heavy trade exposure to China, and perhaps divert flows out of the safe-haven yen, thereby driving the AUD/JPY higher. On the other hand, increasing tensions are likely to have the opposite effect. The Aussie could weaken, and the yen could strengthen as investors may seek for its safety.
AUD/JPY blew up to the upside on the 28th of October and broke its short-term downside resistance line drawn from the high of the 8th of November. After that, the pair enter a very narrow range, which could get broken either way. But given the fact that AUD/JPY looks slightly overextended to the upside, there is a possibility of seeing a bit of retracement lower, to test the above-mentioned downside line from above and then try to bounce back up, where it could aim for recent and new highs.
If the pair struggles to break back below the aforementioned downside line, the bulls may see this as a sign to step in again and push the pair back up towards the 83.05 hurdle, which is the upper side of that small range. A break above that side could lift the rate to test the 83.25 hurdle, marked near yesterday’s high. If that area is no match for the bulls, AUD/JPY could be driven further up towards the 83.60 level, marked by the highs of the 13th and the 17th of July.
On the downside, even if AUD/JPY moves back below the aforementioned downside line, as long as it remains above the short-term upside support line drawn from the low of the 26th of October, we will remain somewhat positive over the near-term outlook. In order to get comfortable with much lower levels, we would need to see a break of that upside support line and a drop below the 81.90 hurdle, marked by the low of the 27th of November. This way we could examine the chance for the pair to shift lower towards the 81.43 obstacle, a break of which may send AUD/JPY to the 81.20 barrier, marked by the low of the 20th of November.
During the European morning, Eurozone’s preliminary CPIs for November are coming out. The headline rate is expected to have ticked down to +2.1% yoy from 2.2% yoy in October, while the core one is anticipated to have remained unchanged at +1.1% yoy. That said, Germany’s headline inflation slowed by more than expected yesterday, suggesting that this could be the case with Eurozone’s headline print as well. However, even if the headline rate declines a tick below the forecast, it would still be near the ECB’s objective of “below, but close to 2%”. We believe that the core rate is likely to attract more attention. Ccoming on top of the softness in recent economic data, like GDP and PMIs, an underlying inflation rate of +1.1% yoy could slightly increase concerns over the bloc’s economic and inflation outlooks. Eurozone’s unemployment rate and Germany’s retail sales, both for October, are due out as well.
Later in the day, we get Canada’s GDP data for both September and Q3. With regards to the monthly rate for September, expectations are for the economy to have grown +0.1% mom, the same pace as in August, but the qoq annualized rate is expected to have declined to +2.0% from 2.9% inQ2. At its latest gathering, the BoC raised interest rates by 25bps and removed the part saying that officials will “take a gradual approach” with regards to future rate increases, which, in our view, means that interest rates can rise faster than previously anticipated if data suggest so.
Canada’s latest economic data have been mainly on the positive side, with both the headline and core inflation metrics accelerating in October, and the unemployment rate for the same month declining to 5.8% from 5.9%. Therefore, we doubt that a decline in the qoq annualized growth rate would be enough to alter expectations with regards to more BoC rate increases in 2019.
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