Trade and Brexit, Brexit and trade…those two themes have been dominating the market for ages. They were certainly present last week as well. Yet we also managed to glimpse something outside those two factors as the Fed, the Bank of Canada and the Bank of Japan all held meetings over a 24-hour period. The conclusion from those three meetings: global interest rates are either on hold or headed lower. That’s probably bad for the dollar but a good sign for gold.
AUD and NZD were up after US Commerce Secretary Ross signalled that a US-China “Phase One” trade agreement could be signed this month. “We’re in good shape, we’re making good progress,” he said in a TV interview. I think this optimism will continue today – the US administration has a noticeable tendency to unleash positive tweets about trade just as the US stock market opens – and that’s likely to continue to support these two currencies today.
As usual, it’s all about trade. There was a Bloomberg article that said Chinese officials doubt whether they can reach a comprehensive long-term trade agreement with the US, because they don’t trust Trump to keep any deal that they agree to. That caused a risk-off move in FX reflected largely in AUD/JPY, which was the worst-performing major pair. NZD however didn’t join in the decline owing to recent good NZ data and yesterday’s change in Westpac’s rate call.
The US stock markets rallied to new record highs (S&P 500) on the Wednesday trading session cheering the new FED’s interest rate cut by 25 basis points to help sustain the US growth in the face of global economic slowdown. The Fed cut removed some of the recession fears going into 2020 even though the FED indicated a pause on its monetary policy easing cycle for now and there will be no hiking until inflation rises “significantly.”
The Federal Open Market Committee (FOMC) dropped its pledge to “act as appropriate to sustain the expansion.” It now says it will monitor incoming information as it “assesses the appropriate path” of rates. The “appropriate path” looks likely to be a flat line for some time – Chair Powell said it would take a "material" change in the Committee’s outlook for moderate growth ( around 2% real growth), inflation near 2% and a "strong" labor market in order to convince them to cut again, while a hike seems even less likely: he said they would “need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.” Otherwise, only one tiny change in the statement.
From the chart it looks like NZD and CAD have plunged, but that’s only because of the scale – a 0.3% decline is hardly the stuff of drama. Actually there was little movement in any of the majors overnight as the market waited for tonight’s FOMC meeting (see below). CAD saw a bit of position-squaring ahead of tonight’s Bank of Canada meeting. It’s been the best-performing G10 currency so far this year and some people apparently want to protect their profits in case the BoC turns dovish. See below for my view (neutral).
Mother Nature was the main factor behind the biggest two-day rally by 10% in the Natural Gas market since last winter (mid-January 2019) from Sunday night opening until yesterday as the weather models are forecasting colder temperatures in the USA for the first days of November.
Taking a break from Brexit, the market is once again focusing on US-China trade talks. It’s clear that as the impeachment proceedings close in on Trump, he’s going to be looking for more and more “wins” that will, he hopes, distract from his malfeasence. Fat chance! But that explains to me why he’s caving on negotiations with China and why a trade deal is likely to come sooner than it would have otherwise. China announced on Saturday that parts of the text for the first phase of a trade deal with the US are “basically completed” while Trump said overnight that the US is ahead of schedule to sign a major portion of the trade deal.
Mario Draghi’s last ECB meeting went pretty much as expected. No change in policy and no big final farewell speech from Draghi. His prepared statement made no reference to his legacy, and when asked what he was most proud of, said “it's the way in which the Governing Council and myself have constantly pursued our mandate… this is part of our legacy: never give up.”
Another “Matthew market,” as in “the first shall be last and the last, first.” Yesterday morning, JPY was the best-performing currency and GBP was the worst. Today, GBP is on top and JPY is on bottom. I’m not sure why this is; the Brexit talk isn’t significantly positive. It’s now all very complicated political negotiations about a general election while the EU sits on Britain’s request for an extension to Brexit until the end of January.
I’m no longer a reporter, so I’ll just briefly recap what happened: Boris Johnson managed to pass his Withdrawal Agreement (WA) “in principle” by a surprisingly large margin (329 to 299). But Parliament balked at his incredibly rushed timetable for passing all the legislation. It’s almost certain now that they’ll miss the Oct. 31st Brexit deadline. EC President Tusk has proposed an extension until Jan. 31st. A general election now looks increasingly likely – although not inevitable -- and the new Parliament can start all over again.
GBP gains despite all the shenanigans. As I mentioned yesterday, the deal under discussion is materially worse than the deal that former PM May negotiated. So why is GBP higher? Because regardless of what kind of deal they’re talking about, it seems that “no deal” is now permanently off the table. That was the worst possible outcome (ok, maybe no deal under a PM Corbyn would be worse).