Morning Commentary: One and Done?

Foreign Exchange - Morning Commentary

One and Done?

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Today will be a critical day for the markets, and specifically for the U.S. dollar, as the Federal Reserve announces its interest rate decision at 11:00 a.m. PST. Markets have been building in a dovish rate hike as weak global economic data combined with weakening U.S. and global equities over the past months have changed the market dynamics from optimistic to pessimistic about future growth.    
 
The markets best guess at this moment in time is for one more rate hike and then for the Fed to go into hibernation for a period of time to assess the state of the U.S. economy and markets. If the Fed does raise interest rates today, it will be the fourth time this year and the ninth time in this cycle going back to the first hike in December 2015. Any deviation from “one and done” will cause a volatile and emotional reaction in the markets that could last a few hours, days or weeks.
 
For the U.S. dollar (DXY index), today could also be a pivotal day. The DXY has been in a secular upswing since 2009 reaching its peak in December 2016. 2018 has seen a resurgence in the DXY, but the DXY has been running out of momentum over the past two months. If the Fed should choose to not raise interest rates today and lay out a more dovish forecast for 2019, we could see a change in the market dynamics and see the DXY begin to weaken sharply.
 
Much is at stake today for the U.S. economy going forward and for the markets. Today’s Fed rate decision will be the most important of Fed Chairman Powell’s stewardship. Through actions and language he must find a way to navigate a most difficult situation. The U.S. economy remains strong overall, but the markets are sending clear signs of distress and weakness ahead. I wish the Fed Chairman well today.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The euro is up for the third day in a row against the U.S. dollar and crosses on the back of positive news regarding the EU-Italian budget and fiscal discussions. Italian equities are rallying strongly today and Italian bond yields have fallen sharply over the past three days and past month. Italian 10-year bond yields peaked near 3.60% a month ago and are now yielding 2.77%.
  • The Central bank of Thailand raised interest rates by 25 bps to 1.75%. This was the first rate hike since 2011.
  • As a sign of the times, inflation is showing signs of peaking as the collapse in oil prices over the past months is exerting downward pressure on inflation. Canadian CPI for November fell by 0.4% and the YoY rate collapsed from 2.4% to 1.7%. Gasoline prices recorded their biggest one-month drop in almost four years.
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