Today is the day when the FOMC will announce its decision on monetary policy. With investors largely convinced that another cut will be delivered, all the attention is likely to fall on whether policymakers will stay willing to act again if needed. We also have a BoC meeting, ahead of the Fed, with Canadian officials expected to stay on hold and maintain their neutral stance. In the UK, the House of Commons decided yesterday to approve Johnson’s call for new elections on December 12th.
The US dollar traded slightly lower against most of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained only against CAD and NZD, while it underperformed the most versus SEK, EUR and JPY.
Today, USD-traders and other market participants are likely to keep their gaze locked on the FOMC decision. At its latest policy meeting, the Committee decided to cut rates by 25bps, with the updated “dot plot” pointing to no more cuts this year and the next. That said, despite the 2019 median dot suggesting that there are no more rate reductions on the table, the Committee was largely divided, with only 5 members supporting that view. Seven still believed that another quarter-point reduction may be appropriate by year end, while the remaining 5 argued that the latest cut was not needed.
After that meeting, the ISM revealed that the manufacturing activity in the US fell to a 10-year low in September, as the prolonged trade conflict between the US and China weighed on US exports, adding to fears of further economic slowdown during the third quarter. This combined with comments from Chair Powell that the Committee will “act as appropriate” and that policy is never on a pre-set course, allowed investors to stay well convinced that officials will deliver another quarter-point cut at this week’s gathering. According to the Fed funds futures, there is a 97% chance for that to happen, while another one is fully factored in for August next year. So, having all this in mind, a 25bps cut by itself is unlikely to prove a market mover. If that’s the case, investors will quickly turn attention to hints as to whether policymakers are willing to act again if needed.
As for the market reaction, the dollar could weaken in case Fed officials signal that they remain willing to act again if needed, but how the equities may perform is not so straight forward in our view. Will investors decide to sell equities because the Fed’s concerns would mean that the economy may not perform as previously expected? Or will they buy on hopes that the Fed will not give up and eventually avert a downturn? As we noted yesterday, judging by the recent rally in US indices amid elevated expectations for an October cut, we believe that the latter could be the case.
Yesterday, although USD/CHF briefly visited the territory above its short-term downside resistance line taken from the high of October 3rd, the pair failed to move towards this week’s high, at 0.9970, and reversed back down. The rate fell back below the downside line again and is now close to one of its support areas, at 0.9932. Given the fact that the pair moved back below its downside line and our oscillators are showing that the downside momentum started picking up, there is a possibility of seeing a bit of further declines. That said, we will wait for some confirmation breaks first before examining that case.
A rate-drop below the 0.9932 hurdle and a slide below all of its EMAs, could increase the pair’s chances of moving further south, possibly aiming for the 0.9907 area, a break of which could lead USD/CHF to the 0.9892 zone. That zone marks the high of October 18th and the low of October 24th, which may help stall the rate for a while. The pair could even retrace back up a bit, but if USD/CHF remains below its EMAs, this might result in another round of selling, which could push the rate below the 0.9892 obstacle and target the 0.9870 level. That level marks an inside swing low of October 17th and an inside swing high of October 22nd.
Alternatively, if the aforementioned downside line gets violated again and the rate limbs above the 0.9970 barrier, which is the high of this week, this may attract more buyers into the game and the pair could travel to the 0.9996 hurdle, a break of which might set the stage for a move to the 1.0028 level. That level marks the highest point of October.
Apart from the FOMC, we also have another major central bank on today’s agenda: The Bank of Canada. When they last met, Canadian policymakers decided to keep interest rates unchanged at +1.75%, noting that the US-China trade conflict weighed more heavily on global economic momentum than the Bank has previously projected. Nevertheless, they maintained their neutral stance with regards to interest rates, reiterating that the current degree of monetary policy stimulus remains appropriate.
Since then, employment data for both August and September came in better than expected, with the unemployment rate sliding to 5.5% last month, from 5.7%. Both the headline and core CPIs slid to just a tick below 2% in August, and stayed there in September, but the trimmed CPI held steady at 2.1% yoy. What’s more, according to the BoC’s quarterly Business Outlook Survey, the Bank saw a slight improvement in business sentiment. So, in our view, all these may allow policymakers to stay sidelined, despite other major central banks taking the easing road.
Flying from Canada to the UK, yesterday, UK PM Johnson’s new bid for new elections was approved by 438 to 20 in the House of Commons. The date for the new election was set for December 12th, after amendments regarding voters’ age, EU citizen votes and a December 9th date were all rejected. The bill will now go for approval to the House of Lords.
As we noted yesterday, despite polls pointing to a big lead for the Conservative Party, due to the UK’s complicated voting system, it's hard to predict the outcome. What’s more, polls were proved wrong in estimating the support for Brexit back in 2016, and thus, we cannot put too much trust on them. It could be either a Conservative victory with a majority in Parliament, something that could set the stage for ratifying the deal Johnson agreed with the EU, a surprise Labour win, or another hung parliament, which could keep Brexit deadlocked.
GBP/CAD continues to trade above its medium-term tentative upside support line drawn from the low of August 9th. But after the sharp uprise that we saw in the beginning of October, the pair had distanced itself quite a bit from that upside line. Only from around mid-October the pair started correcting back down slowly and is now trading below a short-term tentative downside resistance line drawn from the high of October 17th. From the short-term perspective, even if the rate rises a bit higher, as long as it stays below the above-discussed downside line, we will remain cautiously-bearish with the near-term outlook.
As mentioned above, a small push higher could send GBP/CAD to test the downside line, which if holds could attract the sellers again, as they might try to take advantage of the higher rate. If that’s the case, the pair could slide back to the 1.6815 hurdle, or the 1.6728 area, where the last one is marked by the lows of last week and this week. If that area fails to provide any descent support and eventually breaks, this may send the rate to the 200 EMA, or the 1.6580 level, marked near the highs of September 23rd and 24th, and also near an intraday swing low of October 14th.
On the other hand, if the aforementioned downside line breaks and the pair travels above the 1.7007 barrier, marked by the high of October 22nd, this might send GBP/CAD a bit higher towards the 1.7039 hurdle, which is the current highest point of October. The rate may get a hold-up near that level, or even correct back down a bit. That said, if the pair remains above the 1.7000 territory, this could attract more buyers again and GBP/CAD might get another boost, which could bring it above the 1.7093 barrier this time and aim for the 1.7135 zone, marked near the high of May 29th.
In Europe, we get Germany’s preliminary CPIs for October. Both the CPI and HICP rates are expected to have declined to +1.0% yoy and +0.8% yoy, from +1.2% and +0.9% respectively. This could raise speculation that the Euro-area inflation numbers, due out on Thursday, may move in a similar fashion.
From the US, we have the ADP employment report for October and the first estimate of GDP for Q3. The ADP report is expected to show that the private sector has gained 120k jobs in October, slightly less than the 135k in September. This could spark bets that the NFP number, which comes out on Friday, may also come below its September print. That said, we repeat for the umpteenth time that the ADP report is far from a reliable predictor of the NFPs. Taking into account data from January 2011, the correlation between the two time-series at the time of the release (no revisions are considered) stands at 0.45.
With regards to the first estimate of the GDP, it is expected to show that economic growth slowed to +1.7% qoq SAAR in Q3 from +2.0% in Q2. Despite the slowdown, this would keep the average for 2019 slightly above the FOMC’s projections, and thus, it is unlikely to alter much expectations with regards to the Fed’s actions after the cut which is expected to be delivered later in the day. Investors may prefer to wait for the meeting signals before they adjust their bets.
As for tonight, during the Asian morning Thursday, the central bank torch will be passed to the BoJ. Last time, Japanese policymakers refrained from acting, maintaining the forward guidance that the current extremely low levels of interest rates are likely to stay unchanged “at least through spring 2020”. They also reiterated that they will not hesitate to take additional easing measures if momentum towards achieving the inflation target is lost.
Inflation in Japan continued slowing, with both the headline and core National CPI rates declining to +0.2% yoy and 0.5% yoy, from +0.3% and 0.6% respectively. Even the Bank’s own core metric ticked down to +0.3% yoy from +0.4%. This increases the chances of more stimulus by the BoJ, but a recent report said that officials are thinking to refrain from adopting new easing measures this week. However, the same report noted that they may introduce a new way to show their readiness to do so. Therefore, investors may be on the lookout of how they will provide such signals, and whether further action may be in the works for the months to come. As for our view, with little space to ease further, the Bank may decide to wait for a while longer and perhaps rely on its dovish signals to do the work for now.
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