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• FOMC gives markets what it wanted; hastily signals US rate cuts to come this summer/fall.
• Powell cites increased trade uncertainty, weaker business investment, prolonged inflation shortfall.
• Fed’s Bullard dissented; wanted FOMC to cut 25bp yesterday.
• US 10yr yield falls below 2%. August gold breaks out above 1360. Dec Euros trade to new highs.
• USD plunges as the funds got it all wrong with last week’s US data driven pop. Fed ignoring that.
• Lack of detail surrounding Fed’s caution sounding “race to the bottom/currency war” alarm bells across markets.
Dollar/CAD is plunging with the broader USD this morning as the Fed did the unthinkable yesterday by completing caving the market’s demand for interest rate cuts and then some. Not only did the FOMC drop its patient monetary policy stance and reiterate Powell’s recent buzz phrase that they will “act as appropriate to sustain the expansion”, but seven of its members moved their 2019 dot plots lower by 50bp, Bullard wanted a 25bp rate cut right away, and Powell revealed that even those members who expected flat rates agreed that the case for more accommodation has strengthened. The Fed reiterated that the baseline outlook for the economy was a “good one”, citing strong labor markets, rising wages and steady consumer consumption growth, but we think the US central bank did a poor job of explaining why ongoing trade uncertainty and persistently low inflation expectations (things we already knew at the last Fed meeting) warranted such an uber dovish tilt for the interest rate outlook in just one month. We think the Fed capitulated to the bond market’s demands without fully understanding what factors are driving the rush into US paper. We think they’re watching recent dovish turns from the RBA and the ECB and don’t want to appear to be “behind the curve” in what now appears to a competitive, perhaps unavoidable, race from global central banks to lower rates. Ultimately, we think the Fed has lost control here and is now beholden to global bond markets that are concerned about something more serious than the US/China trade war (perhaps structural issues in the US treasury and off-shore Eurodollar markets?). For the time being though, USD fund longs are not investigating further and are just rushing to hit the sell key, after last week’s market bounce of better US data proved to position them incorrectly for yesterday’s Fed meeting. USDCAD, in particular, has plunged another 100pts lower today after collapsing 100pts post Fed. August crude oil prices are surging over 3% higher this morning after reports that Iran shot down a US drone over the Straight or Hormuz, and we feel this is adding to the USDCAD sell pressure. Trend-line chart support in the 1.3170s just gave way prior to the 8am hour, but a much weaker than expected Canadian ADP employment report for May (-16k vs +61.7k for April…not normally a market moving report) appears to be helping the market bounce here.
AUG CRUDE OIL DAILY
Euro/dollar knee jerked higher following the Fed announcement yesterday, and while the market stalled at 1.1250 trend-line resistance heading into the NY close, it blew past this level when gold prices surged higher above the 1360 mark in Asian trade last night. It appears buy stop orders exacerbated the move higher in the August futures and we’re seeing a little selling now in both gold and EURUSD following the much weaker than expected US Philly Fed numbers for June (+0.3 vs +10.4 expected). It’s remarkable to see Powell and Draghi both turn on the dovish jets in the span of just a few days here and traders are now joking that it’s a race to the bottom in terms of global rates and central bank credibility at the same time. Chart support in EURUSD today sits in the 1.1270s while resistance lies in the 1.1320s.
AUG GOLD DAILY
Sterling is pulling back from its highs above the 1.27 after the Bank of England lowered its Q2 GDP forecast during its unanimous decision to hold UK interest rates steady at 0.75% this morning. The BOE is still running with the line that “gradual” monetary policy tightening will be warranted if the Brexit process go smoothly, but this is a huge ‘”if” we would argue. We think this mildly softer economic outlook is leading some GBPUSD longs to take profits here after the gift given to them by the Fed announcement yesterday. Chart support today checks in at the 1.2670s, while resistance is in 1.2700-1.2710 area. The UK reported its May Retail Sales data this morning, and it fell in-line with expectations of -0.5% MoM.
The Aussie is surging higher with most of the major currencies today as the USD trade rushes to re-position post Fed meeting. The bond guys got it right (didn’t pare their bets that the Fed would deliver), whereas the USD trade appeared to get it wrong (by virtue of bidding the USD up on the back of good US Retail Sales, decent Industrial Production data, and the upward revision to the Atlanta Fed Q2 GDP indicator...all things the Fed looked through yesterday). Like EURUSD, AUDUSD struggled to hold gains post Fed as it too had chart resistance to deal with (0.6890s), but like EURUSD as well, it too broke above this level in Asian trade overnight when gold broke higher. We think AUDUSD may cool off a bit at chart resistance in the 0.6930s, but we think Monday’s Trump-inspired, bullish outside day reversal on the charts may have forged a short term bottom here for the pair.
Dollar/yen has had a tumultuous 24hrs of trade. It fell lower with US yields and the broader USD following the Fed meeting, and it collapsed in Asian trade overnight after gold prices broke out. The Bank of Japan meeting turned out to be a non-event for market participants, as governor Kuroda kept all monetary policy measures on hold (-0.1% policy rate, JGB target yield of 0% +/- 20bp, rates to remain low through the spring of 2020). While Kuroda reiterated his concern about downside risks for overseas economies (nothing new), he did say it was “appropriate to think flexibly” with regard to JGB yields, and with that we saw the benchmark 10yr JGB yield trade to -0.17bp (or where it was in 2016). Traders have come in and bought the market following the weaker than expected US Philly Fed report out at 8:30amET this morning. We think the market needs to regain chart support in the 107.70s quickly in order to avoid a rout which could see the market spill below the 107s.
US 10-YR YIELD DAILY
Charts: TWS Workspace
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