Daily FX Market Roundup 11.29.18
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
We’ve seen very little continuation to Wednesday’s moves when the U.S. dollar dropped sharply on the back of Fed Chair Powell’s comments on interest rates. USD/JPY extended slightly lower but GBP/USD retreated while EUR/USD was unchanged. Powell’s view that rates are just under neutral levels is a sign that they intend to slow their pace of tightening next year. However in Wednesday’s note, we pointed out that Fed futures did not change by much because Powell simply said what the market was waiting to hear. Investors had already downplayed expectations for tightening next year with the futures market only pricing in 1 full rate hike in 2019. Thursday’s U.S. economic reports did nothing to confirm or deny the central bank’s caution – personal income and spending grew more than expected but jobless claims increased and pending home sales fell sharply. Meanwhile, the FOMC minutes did not help the dollar. Even though almost all Fed officials saw the need for another rate hike “fairly soon,” they also discussed the possibility of changing the language on “further gradual rate hikes.” The minutes weren’t dovish as some members saw the need for a rate hike possibly before the December meeting but with little clarity on whether this meant a change to accommodate less hikes or more, investors continued to sell dollars. At the end of the day, even with the pickup in spending and the strong Black Friday/Cyber Monday sales, there’s no question that the momentum in the economy is slowing. As a result, we expect USD/JPY to pull back further and USD/CHF to give up Thursday’s gains.
Currency movements were also restrained by concerns about the upcoming G20 meeting. President Trump sits down with President Xi on Friday and we have no idea how the talks will go. In the lead up to the meeting, U.S. officials have suggested that they will most likely proceed with tariffs but on Thursday President Trump said they are close to doing something with China on trade but he doesn’t know if he wants to do it. These elusive comments provide investors with no real comfort, especially after Trump canceled his meeting with Putin. However there are reports that the US could delay additional tariffs until there are further talks and if that’s true, equities and currencies will rally.
Thursday's biggest turnaround was in the euro. At the start of the NY session, euro was one of the weakest currencies because there were reports that the US would levy tariffs on EU autos before Christmas. Concerns about the impact of the tariffs forced investors to ignore better labor data from Germany and stronger Eurozone confidence. Shortly after the NY open, however, the European Commission denied those reports and the EUR/USD u-turned for a rally to 1.14. Although the pair was unable to close above the round number, the market’s negative dollar bias should drive it higher. The Eurozone’s CPI estimate for November is scheduled for release Friday and based on the softer German report, the risk is to the downside but given the current market momentum, the impact on the euro should be limited.
The other big story was oil. Before the NY session began, the price of crude fell below the critical $50 mark. In response, USD/CAD traded above 1.33. However Russia’s talk of output cuts reversed the slide and sent prices sharply higher (crude ended the day up 2%) and as a result, USD/CAD gave up its gains to end the day unchanged. Canada will be in focus on Friday with quarterly and monthly GDP numbers due for release. Growth is expected to have slowed materially in Q3 as a result of softer retail sales and if confirmed, the slowdown would reinforce the slide in the loonie and rally in USD/CAD.
No news is bad news for sterling, which continued to extend its slide. There’s been no meaningful progress in Brexit negotiations and investors are growing impatient. The Australian dollar ended the day higher while the New Zealand dollar sold off despite weaker Australian capex and a stronger New Zealand activity index.