Morning Commentary: Equilibrium

Foreign Exchange - Morning Commentary
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The purpose of this document is to inform clients and colleagues of any major market-moving events or news over the past 24 hours with a primary focus on the foreign exchange markets. Increasingly over the past months, with the exception of Brexit and U.S.-China trade headlines, the foreign exchange market has played second or third fiddle to equities, bonds and sometimes even to commodity prices.

Truth be told, the U.S. dollar (DXY) has been in the doldrums this year. Notwithstanding the remainder of the year, the U.S. dollar has experienced the tightest trading range in more than four decades going back to 1976. The range so far for 2019 has been less than 5% from the low to the high. The JP Morgan currency volatility index continues to sit near all-time historic lows.

Part of the blame for this extraordinary phenomenon lies with the euro which is the second most important currency to the U.S. dollar in terms of global central bank reserves and trading volumes. The euro has been locked in its tightest range on record trading between $1.0879 and $1.1570. Market psychology also plays a key part in this equation; the market is biased for good things to happen in the U.S. and bad things to happen in Europe. In general, data continues to support those conclusions.

It is unclear where the next bout of market turbulence will come from or more importantly, when it will erupt. At this point in time, previous catalysts (Brexit, U.S.-China trade,) are increasingly having little impact on the markets as investors and traders have priced in enough good news. For the time being, continue to expect more of the same.
  • ECB President Christine Lagarde made her first major speech three weeks into her new job. She called for a new policy mix with a greater emphasis on fiscal policy for overcoming the challenges of changing global trade and declining domestic growth. No sooner did she make her speech than PMI data for the EZ was released. Manufacturing data showed improvement in France and Germany but the composite indexes disappointed as the service sector is starting to show signs of contagion from the multi-month decline in manufacturing. EZ interest rates are lower.
  • U.K. PMI data was also released and was very disappointing. The composite index fell from 50.0 to 48.5 (contraction territory) with sharp declines in both manufacturing and services (both in contraction territory). U.K. interest rates are down the most of any G7 country and the British pound is the worst performing major currency today.
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This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
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