Market News & Analysis

Week Ahead: Trading Currency- USD

“Even more moderate than expected by the market” – this is a wonderful summary of the March meeting of the Federal Open Market Committee (FOMC). Considering that the market has been quite pessimistic about global growth prospects in the past six months, the meeting itself is very interesting.

From the dollar’s point of view: we’ve been looking for the dollar to moderate in 2019 after 2018. Now, in some of the crosses, that’s exactly what happened, such as GBP. However, countries such as the Euro are quite flexible against the DXY (dollar basket) because of domestic and international economic influences.

So, did the Fed finally lead to the expected moderate trend of the US dollar after the March meeting?

Yes, it is unlikely in the short term, and the medium term is unlikely, for the following reasons:

– Dot Plots: entering ‘No Move in 2019, with 2020 raising rates once, this will make the federal funds rate to 2.5% in the coming 21 months. No rate hikes are expected in 2021. It needs another rate hike  in 2022 or some time after that, in order to reach the median estimate of the neutral rate,  at 2.75 percent. The sharp shift in points shows the rapid and sharp decline in the dollar after the news conference. There comes a steep change in the U.S. yield curve also. The market actually thinks the next move in the fed funds rate is actually a cut in output. All of this is explicitly dollar moderator.

– Balance sheet runoff: as the board indicated, the balance sheet decision will end in September, and the current rate of decline will begin in May. All said and done, the fed’s balance sheet would be 17 per cent of us GDP, or $3.7tn, much higher than had been expected. This would relieve pressure on fixed income and overall financial “stress” in lending. Again, one can argue mildly about the dollar on this point.

Powell’s testimony, however, suggests that the reasons for the dollar’s steep decline are unlikely to last a year.
– he clearly does not worry about domestic growth prospects; Noting that the weak December retail sales measurement “is inconsistent with a lot of other key data, such as “The wealth effect, employment, wage growth and corporate earnings.

The upshot of all this is that the fed is more concerned about the impact of slowing global growth on the US economy than the domestic economy itself. China, Europe, and Japan are slowing, suggesting that the Euro, Japanese Yen and emerging market currencies will fall as traders move out of risk and into the stronger currency economies, such as the United States.

Yes, this will annoy the president and, to some extent, annoy the Fed, but as the dollar continues to weaken on the basis of the current decline in 2019, the dollar is likely to suffer as the cross market sees higher economic risks.

 

Opening Call: Monday 18th March 2019 

 

Each #Market In focus: Led by Chinese stock market, Asian shares climbed, pushing global stocks to their highest levels since October ahead of this week’s federal reserve policy meeting.

U.S. #stocks rose with The Dow Jones Industrial Average climbed 139 points, or 0.5%, to 25849. The S&P 500 added 0.5% and the Nasdaq Composite advanced 0.8%.

#Gold futures scored higher while #Oil prices edged lower, pulling back from a four-month high. Analysts have expressed concern over further signs that the pace of Opec production cuts is slowing as crude prices extend their 2019 rebound.

The #USdollar traded slightly lower across the board.

 Weekly Forex Market Trading Insights

Looking into the Currency Point –USD, it is likely to go down from 2018 rally to more moderate even bearish move in 2019. With the release of the Jan. Federal Reserve Minutes and weak macro data, investors may consider a slowdown of the American economy. Moreover, reactions from the market, especially the movements in the bond, have made Board turn on new views on the Fed Funds rate and GDP.

Some key highlights towards USD sensitive from the January FOMC meeting:

Most members observed softer sentiment, a weaker global outlook, and ‘materially tighter financial conditions’.

This led to an estimation of ‘somewhat step down growth’,  from ‘solid’ down to the ‘strong’ and further. Tighter financial conditions in particular have triggered the market to start to discount rises in the Federal Funds rate.

Members discussed recent “softness” in inflation although it ‘remained near 2 percent’. An upward inflation is ‘hoped’. The market-based measures of inflation had lowered in recent months. But survey-based measures of inflation expectations were ‘little changed’. This probably explains why the Federal Funds rate may remain on hold for 2019.

Most members agreed to adopt a ‘patient and flexible approach’ of policy rather than a hiking bias communication.

The justification behind is the before mentioned factors. Such as tighter financial conditions, softer inflation, slower foreign growth, and trade policy uncertainty. But there was disagreement about the adjustment to the Fed Funds rate in the back end of the year. Some supported that increases were necessary ‘only if’ inflation was higher than in their ‘baseline’ (aka 2%). Meanwhile, ‘several’ others proposed an increase if the economy evolved as they expected. So we now have a split around rate rises. We see a slight hike bias on top of the baseline of on hold – a mild USD positive.

 About the balance sheet, almost all Board members thought FOMC shall stop reducing the Fed’s balance sheet in the latter time of this year.

The balance sheet topped out at US$4.5 trillion.  It is likely to be US$4 trillion in size in the coming June. It is much bigger than the forecast,  and ‘enormous’ when compared to the balance sheet pre – Global Financial Crisis. Members suggested that policy needs to be ‘flexible in principle’, as financial markets might being impacted by Quantitative Tightening (QT). QT is going to end at a much higher level than estimated. It indicates that market ‘support’ is possible– USD dampener.

With these points in mind,  ‘changes’ to policy would be expected from Fed  in the near March meeting. A weight would be put into USD G10 pairs.

FEB. 26, 2019 – Global markets look to optimism 

Global markets are showing gains on the welcoming US-China trade optimism. In the US Markets, we saw Dow Jones Industrial Average reaching 26150 with 0.5% up, the Nasdaq Composite gained 0.5%, and the S&P 500 added 0.3%.

In Asia, mainland China impressed the market with robust gains and surging trading volumes. It was led by the 5.6% growth of Shanghai Composite Index reaching a 34-month high. We also see an upside trends of 0.5% in Japan’s Nikkei, and Hong Kong’s Hang Seng Index.

Looking at European Markets, stocks lifted with positive sentiment as progress in a possible trade deal between US – China. The Stoxx Europe 600 index rose 0.3% at 372.18, climaxing its highest level in more than four and a half month. Germany’s DAX topped 0.4% with a three-month high intraday. Italian and France’s CAC 40 stocks closed by up 0.9% and 0.3% respectively. While U.K. FTSE 100 rose slightly with 0.1%, as some miners and oil companies fell. Spain’s Ibex 35 ended flat.

FOREX

The US Dollar (DXY Index) generally weakened across the board intraday amid an improvement in sentiment about the US – China trade deal on table. The U.S. dollar fell recently across a broad range of emerging markets currencies. We will look to see the market impact from Federal Reserve Chairman’s semi-annual monetary policy report coming soon. If it appears that interest rates are unlikely to rise, the weight on the dollar may become less attractive to yield-seeking investors.
In other markets, the Japanese yen had changed slightly versus the dollar. The euro nearly reached $1.1338. While Brexit still unresolved, the British pound regained some strength as trading continued. Sterling was up from $1.3040 to $1.3059 lastly.

FEB.28 – FOREX – See how is the US Dollar trending

The dollar has strengthened thanks to its yield advantage over other developed market currencies.

The WSJ dollar index, which measures the greenback against 16 currencies, was up 0.1% at 89.33. The dollar rose 0.2 percent against the euro and 0.3 percent against the yen. The dollar firmed after federal reserve chairman Jerome Powell testified to congress that central bankers were close to announcing plans to end their $4 trillion bond portfolio runoff. Officials began reducing their holdings of treasury and mortgage securities from the global financial crisis in 2017, and plan to continue to do so after the runoff, primarily by reducing their holdings of treasury. The federal reserve, which raised interest rates four times in 2018, is pausing to push rates closer to pre-crisis levels. In his senate testimony Tuesday, Mr. Powell said that is partly because of signs of weakness in the global economy.