Morning Commentary: Divergence

Foreign Exchange - Morning Commentary


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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Today could be an important day for the markets as the Federal Reserve meets to determine if there are any necessary changes to the Fed’s monetary policy from the previous meeting. Markets are expecting a nearly 100% probability of no change in interest rates. But based on the last FOMC meeting, investors and traders are slightly tilted toward a continuing dovish bias from the Fed and a continuation of the Fed’s most recent statements about being “patient” and on hold.
As the Fed pivoted to a more dovish bias in January from its hawkish tone in November and December, U.S. and global equities have begun to diverge from interest rates. Under more normal trading patterns, when equities rise based on expectations of better growth or earnings, interest rates usually follow in lock step. But beginning in December, there has been a sharp divergence between equities and interest rates, and they have gone on separate paths.
Equities pivoted in late December from their free fall and ever since have been pushing steadily higher back towards their previous highs seen in Q4.  Interest rates, on the other hand, have remained pinned down since their December collapse as ongoing concerns about growth and weak inflation have changed expectations going forward. Despite the optimism in equities, Fed funds futures are pricing the Fed to ease in the next two years. The probability of a Fed rate cut has risen to nearly 37% for January 2020.
This divergence will not last and either equities or interest rates will realign again. This divergence has had a negative byproduct for those in the foreign exchange market which is a general paralysis and a lack of movement or direction which we have touched on previously. The euro traded in a very narrow 30 point band overnight and the euro has opened and closed to start the NY session at almost the exact same levels over the past 48 hours. Stay tuned for the FOMC announcement at 11:00 a.m. PST today followed by Chairman Powell’s press conference at 11:30.
  • The Bank of Thailand left interest rates unchanged as expected at 1.75% by a unanimous vote and they downgraded growth for 2019. Why is this important for us to know? Despite Thai growth being near 4%, the change in tone by this central bank from the February meeting (vote was split with 50% favoring a rate hike) is a cautionary signal about concerns about future global growth and the interconnectivity of supply chains, and it is reflective of other central banks backpedaling away from more hawkish stances.
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