Morning Commentary: Whipsaw City

Foreign Exchange - Morning Commentary
Whipsaw City
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Beginning with yesterday’s FOMC meeting and dealing with headlines this morning that China is doubting if a long-term trade deal is possible with President Trump, markets and investors have been whipped around by the price action over the past 24 hours. As we arrive this morning, markets are in “risk-off” mode with global equities faltering, G7 interest rates moving lower again, commodity and energy prices weakening, and safe haven currencies and gold on the rise.

Beginning with yesterday’s FOMC meeting and press conference, markets experienced a bloodbath in terms of price action that has continued overnight. Initially, the FOMC headlines at 11:00 combined with Chairman Powell’s early responses to the Q & A left the impression that yesterday’s rate cut would be the last for a while and the Fed would be “assessing” the impact of the most recent rate cuts. Interest rates rose and the U.S. dollar strengthened. But shortly after that, Powell reversed course and said that holding rates at their current levels would be appropriate as long as the outlook and inflation stayed within the Fed’s expectations. Markets did a complete 180 degree turn; rates fell and the U.S. dollar sank.

Chinese data and comments regarding a trade deal added another dose of volatility to the markets. Chinese Manufacturing PMI for October came in well below consensus at 49.3 against expectations of a 49.8 print. Even non-manufacturing disappointed falling below consensus estimates of 53.6 to 52.8. The headlines that followed later in the session concerning the prospects for a trade deal with President Trump added to full “risk-off” sentiment.

With the impeachment process heading into a new phase today and the U.S. jobs data tomorrow morning, markets will remain anxious and on edge. Continue to expect the unexpected, and importers and exporters should remain tactical given all the uncertainty in the markets.
  • The Bank of Japan left interest rates unchanged at -0.1% while emphasizing that it is prepared to cut further if necessary. They also stated that they expect interest rates “to remain at their present or lower levels as long as it is necessary.” They also lowered their future growth and inflation forecasts. Japanese interest rates are lower, but the Japanese yen is the strongest major currency today on the back of “risk-off” sentiment.
  • Hong Kong reported very weak Q3 GDP data. Market expectations were expecting a mild contraction of 0.6% q/q and 0.3% y/y, but instead, GBP collapsed by 3.2% q/q and 2.9% y/y. The protests and trade war continue to hammer the economy with little relief in sight.
  • U.S. Personal Income and Spending for September came in near expectations with increases of 0.3% and 0.2% respectively. The key core PCE inflationary index came in at expectations of 1.7% which is slightly lower from the 1.8% last month. U.S. interest rates are down on the session and lower for the third day in a row.
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