Morning Commentary: Is the Worst Over for Now?

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Is the Worst Over for Now? Share this story: Alan Rose Foreign Exchange Head Trader

Emotional and near panic equity selling has appeared to have run its course and has been temporarily replaced by investors who again see value in the market. U.S. equities have had two huge rebound rallies over the past two days allowing for the first two-day back-to-back gains in over a month. The volatility index (VIX) has fallen sharply over the past three days as it appears that market sentiment and tone is better balanced between buyers and sellers.   A combination of factors has changed the market dynamics for the short term. For one, the White House has abated from their attacks on the Federal Reserve and, in particular, Fed Chairman Powell. Second and most importantly, the market is slowly pricing out almost all the Fed rate increases for 2019 and now forecasts a small probability of a rate cut in January 2020 despite recent pronouncements for more rate increases in 2019 from the Fed just over a week ago.   This change in interest rate dynamics is not only helping change the tone regarding equities/commodities again, but it is also exerting some downward pressure on the U.S. dollar. It is very interesting to note that the U.S. dollar (DXY) has weakened the past two days and that safe haven currencies (CHF, JPY) are very strong today as equity sentiment appears to have shifted. The USD/JPY, in particular, has been a mirror image of U.S. equity performance over the past two weeks; as U.S equities collapse and interest rates fall, the USD/JPY has moved in lock step lower and yet the JPY remains very strong in the face of stronger equity performance.   Market concerns about U.S. growth weakening in the future and the Fed remaining on hold could change the market dynamics regarding the future path of the U.S. dollar. The U.S. dollar could become vulnerable without the protection of higher interest rates; budget and trade deficits, a government shutdown, polarized Washington politics and the erratic and inconsistent nature of the White House could fuel further U.S. dollar weakness.   Markets are thin, illiquid and remain highly volatile; all of this could change in a moment’s notice, but the vulnerability of the U.S. dollar bears watching as we move into the New Year. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: German CPI for December came in below expectations at 0.1%. YoY fell from 2.3% to 1.7%. Energy price declines are behind the benign inflation data.

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