Morning Commentary: Chain Reaction

Foreign Exchange - Morning Commentary
Chain Reaction
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
With so much geopolitical uncertainty and a trade war rippling through the global economy, market psychology sees global interest rates moving in one-direction: lower. Investors continue to search for yield and safe havens during these uncertain times. In the background and feeding into this negative sentiment, global central banks have continued to move interest rates lower and apply all monetary tools available to keep interest rates suppressed.

But what happens when investors begin to lose their appetite to invest at these extraordinarily low yields and/or governments reduce their purchases of their own bonds? The market got a preview of that overnight when Japan had its worst bond auction in three years as investors balked at buying Japanese bonds which, combined with better-than-expected economic data (see below), squeezed Japanese interest rates higher and set off a chain reaction of higher interest rates across the globe.

U.S. interest rates have followed suit and are up sharply today following three days of declines and set off another bout of U.S. dollar buying. Despite the ongoing impeachment inquiry into President Trump, global investors continue to see the U.S. economy and the U.S. dollar as safe havens. The U.S. dollar (DXY) is up in four of the past five sessions and has made another new high for the year; even gold has fallen by nearly $80 over the past five sessions. Continue to expect the unexpected during these turbulent economic and political times.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The Aussie dollar is the weakest of the major currencies today. The Reserve Bank of Australia (RBA) cut interest rates as expected by 25 bps to 0.75%. This is the third time this year that the RBA has cut interest rates. The RBA’s message was dovish and stated that they are prepared to ease monetary policy further if needed to support sustainable growth. The Aussie dollar made another new low for this year after the announcement.
  • Japan reported better-than-expected economic data today. The UR fell from 2.3% to 2.2%. The key Tankan manufacturing index also beat expectations and even the non-manufacturing sector of this report came in better than expectations. Japanese 10-year yields jumped by 6 bps to -0.15%.
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