Daily Market Pulse

USD bounce fades post FOMC


The Fed has had their say and currency traders have been buying dollars since the announcement yesterday. While stressing that the outlook for the economy is uncertain, Chairman Jerome Powell, said the current level of bond purchases is appropriate. The news that interest rates will likely remain near zero through 2023 did not surprise the markets. Powell’s remarks also indicated that additional fiscal stimulus will likely be needed. According to reports, Democrats and Republicans are getting closer to a deal on an injection of around $1.5 trillion. Retail sales came in yesterday at 0.6% in August, below the expected 0.7%, and lower than July’s 0.9%. Analysts are indicating the move lower is due to government programs ending at the end of July. Focus here in the US now shifts to initial jobless claims for the week ending Sept. 11. The number of people filing for unemployment is expected to fall to 850,000 from the previous weeks’ 884,000. As the USD goes up, the equity markets fall and US stock futures were lower this morning, as DOW Futures were down more than 200 points early this morning. Normally, the prospects of lower rates for a prolonged period would spur purchases of equities. However, that was not the case on Wednesday. Once again, the “tech sector” weighed on the indices as Apple, Facebook, and Microsoft all closed lower. US Treasury yields are lower this morning following the Fed announcement yesterday, with the 10-year note at 0.6773%, and the 30-yer bond at 1.4343%. 


EUR/USD has been steadily rising early this morning after reaching its lowest level in a month. Technically, the single currency is retracing some of its losses from yesterday when the 50-day moving average crossed the 100 and 200-day moving averages on the downside. Overnight RSI had reached an oversold level of 28, and traders seem to be “short-covering’ early this morning, as the RSI level has risen to 46. Pressure on the GBP ahead of the Bank of England decision has benefited the EUR and EUR/GBP is trading higher. According to Eurostat’s final reading of the Eurozone CPI report for August, the consumer prices came in at -0.2% yearly, meeting the flash estimate of -0.2% and -0.2% expectations. Core CPI figures rose by 0.4% versus +0.4% previous and +0.4% expectations. Monthly, the Eurozone’s CPI figure for August softened by 0.4% versus -0.4% expectations and -0.4% previously while the core CPI numbers came in at -0.6% versus -0.5% expected and -0.5% last. Aiding the EUR rise this morning were moments from European Central Bank (ECB) Vice President Luis De Guindos, who said during a webinar this morning that “the exchange is a fundamental economic variable which affects imports, exports, imported inflation or deflation.” That statement and the oversold condition earlier this morning spurred traders into buying the EUR. The direction today will be decided by the reaction to USD news later this morning.


GBP/USD is also rising this morning after dipping to overnight lows as the 50-day moving average has risen above the 100 and 200-day moving averages and the 100-day looks to cross the 200-day as well. RSI is currently rising at 57, after being below 40 overnight. Focus this morning shifts to the Bank of England, which is widely expected to leave its policy unchanged. Investors will watch the BOE's guidance amid a stop-start economy. Local lockdowns are enacted in various places in Britain and new restrictions may be added. Prime Minister Boris Johnson has ceded ground to "rebels" in his Conservative Party and allowed for greater parliamentary oversight over the controversial Internal Markets bill. The legislation knowingly violates the Brexit accord Johnson signed with the EU last year. This has helped the pound as it has moved higher in response to PM Johnson’s comments. After the BOE announcement, assuming there are no surprises, the GBP could return to moving on Brexit news, which at the moment is not positive.


USD/JPY continues to test and breakthrough support levels currently trading at its low of the day. The currency pair Is well below the moving averages, and the RSI level has dropped below 30, currently trading at 29. The Bank of Japan left its interest rate unchanged at -0.1% as expected, in its first decision after Yoshihide Suga replaced Shinzo Abe as prime minister. The BoJ will also continue to purchase JGBs, without an upper limit, to keep the 10-year JGB yield at around 0%. The decision was made by 8-1 vote as usual, with Goushi Kataoka dissenting, pushing to strengthen monetary easing. The central bank said the economic outlook is “likely to follow an improving trend through the materialization of pent-up demand and supported by accommodative financial conditions and the government’s economic measures”. But pace would be “only moderate while the impact of COVID-19 remains worldwide”. Annual CPI core is likely to be negative for the time being, but it’s expected to turn positive and increase gradually with economic improvement. It also reiterated the “extremely high uncertainties” over the pandemic impacts. For the time being, it will closely monitor the impact of COVID-19 and “will not hesitate to take additional easing measures if necessary.” New PM Suga is expected to follow the path of former PM Abe concerning fiscal policy, and there were no surprises in the BoJ announcement.


USD/CAD had been trading at overnight highs earlier this morning but has given back some of that move in the last few trading hours, as the currency pair had moved into an overbought situation. The 50-day moving average crossed the 100 and 200-day moving averages and short covering and lower oil prices drove the USD/CAD higher. RSI levels rose above the 70-level to 73, and some profit-taking has emerged with the RSI level moving way down to 53. Inflation data from Canada showed the Consumer Price Index fell 0.1% in August against expectations of a modest increase. After showing some upward move over the last few trading sessions, oil prices are lower this morning, as concerns remain over weak fuel demand as the oil rigs in the Gulf of Mexico prepare to resume output after Hurricane Sally came through. Brent crude futures fell $0.67 to $41.55 a barrel, after having risen 4.2% on Wednesday, while US West Texas Intermediate crude futures were down $0.70 to $39.46 a barrel after rising 4.9% yesterday. According to Reuters, OPEC+ meets today to review the market but they are unlikely to recommend further cuts in oil output at this time. 


In an attempt to help its battered economy, recover from the impact of the coronavirus pandemic, Mexico’s central bank said that it has extended measures designed to strengthen credit channels and provide liquidity in the financial system. Banxico said liquidity facilities first announced in April will be extended until the end of February 2021, while a government securities repurchase window is being increased by a further 50 billion pesos ($2.37 billion). So far, Banxico said, the measures have been successful. Deputy Finance Minister Gabriel Yorio told Reuters in an interview last week that the ministry was talking to the banking industry and the central bank to extend relaxed banking credit rules to avoid defaults and loss of collateral. The government wants to reduce the economic fallout of the pandemic in Mexico, which is still scarred by memories of the 1995 ‘Tequila crisis,’ when Mexicans lost homes and savings. Yorio said the finance ministry and the central bank face a balancing act in coming up with looser regulations that are effective but at the same time tight enough to prevent a systematic financial risk. The central bank said in a statement: “Even though our country’s financial markets have displayed more stable behavior recently, risks that could negatively affect the Mexican economy and financial system persist.


Japanese companies will continue to focus their supply chains in China, where the economy is recovering rapidly in the post-epidemic era, business representatives and experts said, despite rising US-China tensions and the Japanese government's drive to bring factories back. A recent White Paper by the Japanese Chamber of Commerce and Industry in China drew on 10 surveys since January that involved the active participation of 8,678 member companies. The results reflected the importance of the Chinese market to Japanese companies. A key factor that's driving up demand for Japanese businesses in China is the successful containment of the COVID-19 outbreak, along with the steady economic resumption. As China's domestic market has recovered, so has the business performance of Japanese companies, said Takeo Donoue, director-general for the Beijing office of the Japan External Trade Organization, who spoke at the launch of the white paper. Donoue noted that the auto industry and its suppliers, for example, are doing much better in the resumption. More than 70 percent of the companies said they appreciated the Chinese government's response to the COVID-19 pandemic. Some also called for the early normalization of travel between Japan and China and a response to the expiration of visas and residence permits, said the paper. However, not everything is going smoothly. Rising US-China trade friction makes it difficult for Japanese companies to discern trade trends and make production plans, and it is unclear how much the friction, which has expanded from trade to technology, will affect Japanese companies, said Donoue. Japan allocated 220 billion yen ($2.1 billion) in its economic stimulus package in April to help Japanese companies in China move back home or to Southeast Asian countries. Tokyo aims to diversify its supply chains and ensure domestic industrial security.


Brazil’s central bank kept its key interest rate at a record-low 2.00% on Wednesday, pledging to stimulate the coronavirus-hit economy with “forward guidance” rather than more rate cuts because of the risk to financial market stability that they could pose. In a statement accompanying the unanimous decision, the bank’s rate-setting committee known as “Copom” said inflation in the short term may be higher than previously thought, but a bit lower over the next two years than previously forecast. The decision to hold the Selic rate at 2.00% broke a run of nine consecutive cuts, with policymakers repeating their recent warnings that any further easing could threaten financial market stability. But Copom did not signal the end of the easing cycle, noting that uncertainty surrounding the economic recovery is unusually high due to the COVID-19 pandemic, fiscal stimulus is likely to expire at the end of the year, and the dominant services sector remains weak. “The statement was dovish, relative to expectations, and indicated more of a pause rather than the end of the cycle,” said Tatiana Pinheiro, chief economist at BNP Asset Management in Sao Paulo. “At the end of the day, if the fiscal situation improves and inflation is still below target, Copom still has room to cut (rates). The door is still open,” she said. Copom’s decision was expected by all but one of the 38 economists surveyed in a Reuters poll.


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