Morning Commentary: Back to Square One

Foreign Exchange - Morning Commentary

Back to Square One

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
“Back to square one” means to go back to the beginning, after a dead-end or failure. We have been characterizing the foreign exchange market recently as unable to build any traction or momentum either in a bullish or bearish direction. Trading cycles appear to last no longer than 24-36 hours before momentum is exhausted and currencies return home to a central pivot point.
While U.S. and China trade tensions have broad implications for all the markets, for now, the market prefers to sit, monitor the situation and await the next course of action by either the White House or China. Right behind the U.S.-China trade tensions is the Fed meeting on September 26 where the market is nearly 95% certain of another Fed interest rate increase.
What will be important for the markets regarding the Fed meeting is the Fed’s forward guidance regarding future Fed policy concerning growth and inflation. Today’s U.S. NFIB Small Business Optimism Index was at a record high (see below) and continues to support the notion of U.S. exceptionalism regarding continuing strong growth expectations relative to its peer group which should keep the U.S. dollar steady to stronger in the very short term..
Continue to expect short bursts of activity either in a bullish or bearish direction but with either course of action prone to failure. The euro has traded in near the same ranges over the past six days with an inability to break out on either side. Many other major currencies fit that same dynamic while many emerging market currencies remain vulnerable to further weakness. Continue to expect more of the same lethargy and lack of direction for the very short term.
  • The German ZEW business survey came in better than expected after a string of very disappointing economic releases over the past week. Both parts of the index regarding the current situation and expectations components came in stronger than expected. It is the second consecutive monthly improvement which is something not seen since last fall. The data had little impact on the euro.
  • The U.S. NFIB Small Business Optimism Index rose to 108.8 today which is the highest level since 1974 and exceeded the previous peak from September 1983. Capital spending plans are the highest since 2007, and inventory plans are the highest since 2005. A record percentage of nearly 25% of small businesses plan to add more workers. U.S. interest rates are higher on the session and the U.S. dollar is slightly stronger.
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