Morning Commentary: The Calm Before the Storm

Foreign Exchange - Morning Commentary
The Calm Before the Storm
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets are attempting to digest an enormous amount of information today but net-on-net, equities, interest rates, and the U.S. dollar were largely where we left them last night with a few minor exceptions until a Trump tweet a short while ago. The mega events that are still undetermined are the outcome of the U.K. election today and whether the White House will proceed or delay additional tariffs on China scheduled for this Sunday.  President Trump just tweeted that we are very close to a Phase 1 deal and has provided a boost to equities and interest rates despite the disappointing U.S. economic data (see below).

Yesterday, the FOMC at its 11:00 PST announcement left rates unchanged and the communication that followed regarding the economy and future course of monetary policy met expectations and barely moved the needle for the markets. But at 11:30, when Fed Chairman Powell presided over the regular press conference, he proved once again that he has been unable to master Fed speak in answering questions from the press and, with his dovish comments about inflation, set off a chain reaction of lower interest rates and a much weaker U.S. dollar. Markets are still digesting the impact of Chairman Powell’s statements.
  • The ECB left interest rates unchanged at 0.0%, as was expected, and new ECB President Christine Lagarde’s press conference covered all the bases. Downside risks remain but have become “less pronounced”. She said she is neither a hawk nor a dove but wants to be an owl which is an animal that represents wisdom. All in all, EZ interest rates are near unchanged as is the euro.
  • Turkey cut interest rates by 200 bps today from 14% to 12%... 50 more bps than expected. Rates started this year at 24% but under President Erdogan’s constant pressure, a new head of the central bank, a weakening economy and declining inflation, rates have fallen dramatically since the summer. Fortunately, the Turkish lira has remained stable during this dramatic fall in interest rates.
  • The Swiss National Bank kept interest rates steady at -0.75% as was expected. It was a dovish hold as the central bank cut its inflation forecasts for 2020 and 2021. The Swiss franc is near unchanged.
  • Brazil cut interest rates by 50 bps to 4.50% as expected. The central bank left the door open to further rate cuts and the Brazilian real has continued its appreciation over the past two weeks as have many other Latin American currencies.
  • U.S. PPI came in below expectations at 0.0% against consensus of a gain of 0.2%. Ex-food and energy also came in at 0.0%, which was also below expectations. PPI YoY remains at 1.1% and ex-food and energy fell from 1.6% to 1.3%. Jobless claims spiked to 2-year highs of 252,000 from 203,000 but seasonal factors played a part in the large increase.
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