By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The U.S. dollar ended the day higher against all of the major currencies but by the end of the NY trading session, the currency had given up a large part of those gains. President Trump provided zero details on his tax-reform plan, leaving the market with nothing more than the proposal released earlier. It's still going to be a long road to Congressional approval and the changes that we’ve seen so far are less encouraging than his campaign promises. For this reason, we could see the dollar start to give up its gains as the tax-reform excitement fades. Fed officials, including FOMC voter Dudley, continued to express caution despite last week’s hawkish FOMC statement. In his speech on Wednesday, he said current Fed rates are likely appropriate for the near term as inflation has surprised to the downside this year. He felt that the Fed does not need to be preemptive ahead of inflation as expectations are uncomfortably low. But of course he qualified his comments, saying he is the most dovish member of the central bank. Wednesday’s economic reports had very little impact on the greenback. Durable Goods Orders rebounded 1.7% in August after falling -6.8% the previous month. Excluding transportation orders, demand was weaker than the prior period. Pending home sales also fell more than expected, dropping -2.6% against projections of -0.5%. Revisions to second-quarter GDP are due on Thursday along with jobless claims and the trade balance. Fed President George is scheduled to speak.
Wednesday's biggest turnaround was in the Canadian dollar, which fell sharply on the back of Bank of Canada Governor Poloz’s comments. Investors were positioning for hawkishness before the speech, especially after comments by Finance Minister Morneau on Tuesday. In the hour before he spoke, the Canadian shot sharply higher as investors hoped that he would confirm that another rate hike is coming. However instead of doing so, the head of the Bank of Canada said there is no predetermined path for Canada interest rates and they won’t be mechanical on rates because inflation and wage growth is slower than they anticipated. So they plan to proceed cautiously, which basically means that there will be no rate hike in October and a lower chance of tightening in December. The BoC is not happy with the rise in the currency and with supply growth likely to restrain inflation, the mere suggestion that they could be done tightening for the year was enough to send USD/CAD above 1.2450. Given how much investors have sold USD/CAD over the past 4 months, Wednesday’s outlook from the BoC governor should prompt additional short covering, driving USD/CAD above 1.25.
The New Zealand dollar sold off on the back of the Reserve Bank’s monetary policy announcement. As expected interest rates were left unchanged. The RBNZ said policy will remain accommodative for a considerable period and a lower currency would help increase tradable inflation, which is important because they see headline inflation declining in the coming quarters. These dovish views drove NZD lower and is likely to keep the currency under pressure in the coming days. The Australian dollar also traded lower on the back of USD strength – no Australian economic reports were released.
While EUR/USD sold off for the third consecutive trading day, buyers are swooping in above 1.1720. This level is significant because it is where the 200-week SMA converges with the 23.6% Fibonacci retracement of the 2008 to 2016 sell-off as well as the 38.2% Fib retracement of the 2014 to 2016 decline. This is a very important support level and the prime place for EUR/USD to bounce. On a fundamental basis, the outlook for the Eurozone economy is positive as it should only be a matter of time before Germany announces a coalition government. With the Federal Reserve meeting and Trump’s tax speech behind us, investors will be able to shift their focus to the European Central Bank, which made it very clear that balance-sheet changes are coming next month. For this reason, we like buying euros and believe that the EUR/USD will find its way back above 1.18. German consumer prices and Eurozone confidence numbers are scheduled for release on Thursday. Improvements are expected on both fronts.
With no major UK economic reports on the calendar, sterling traded lower against the greenback. However one often overlooked report was released – the Confederation of British Industrial’s Distributive Trades survey. The index jumped sharply higher in September, which is important because it reflects a significant improvement in consumer demand. According to the report, UK retailers saw the fastest sales growth in more than 2 years. This bodes well for the broader retail-sales report and reinforces the Bank of England’s positive outlook. If BoE Governor Carney, who speaks on Thursday, repeats that a rate hike may be needed, we could see GBP/USD shoot back up to 1.35. However if he leaves the market less than convinced that rates will be increased before the end of the year, GBP/USD could test support at 1.3285.