Morning Commentary: 1-2-3-4 and counting

Foreign Exchange - Morning Commentary

1-2-3-4 and counting

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
If the first five weeks of the New Year are any indication on how the U.S. dollar (DXY) is going to perform throughout 2019, we are in for a wild and unpredictable ride. Since the beginning of January, the DXY index has gone through four distinct phases of alternating bearish and bullish patterns. Most surprising is the fact that we are right back to where we started on January second.
It is becoming increasingly difficult to forecast currency movements because its connections and correlations with equities, interest rates and commodities is fraying. Correlations between interest rate differentials and currencies are the bedrock of long term historical forecasting and those correlations are not working as they have in the past. U.S. 2-year and 10-year yields collapsed in December and remain pinned down near their recent lows as the Fed shifted gears from hawkish to dovish, and yet, the DXY remains strong.
In the short term, it appears the market has absorbed the shift in monetary policy from the Fed and has once again focused on economic weakness in the EZ and in China. This morning, we have had another round of disappointingly weak data out of the EZ with German December industrial production, Spanish industrial production and Italian retail sales all badly missing to the downside once again.
Overlaid on top of the EZ economic weakness was the Bank of England (BoE) monetary policy report which has sent the British pound on a roller coaster ride sharply lower and now sharply higher. The Bank of England left interest rates unchanged as expected at 0.75% by a unanimous vote of 9-0. Bank of England Governor Carney stated that Brexit damage has increased as the country operates under the “fog of Brexit.” The BoE has sharply downgraded GDP growth for 2019 from 1.7% to 1.2%. U.K. interest rates moved sharply lower and the GBP cratered before recovering on the back of renewed optimism regarding a Brexit deal. Volatility is here to stay…continue to expect the unexpected!
  • The Bank of India surprised the market this morning by cutting interest rates by 25 bps to 6.00% by a 4-2 decision. In addition, they shifted their stance to neutral from a calibrated tightening bias and will focus on achieving price stability and growth maximization. The Indian rupee is one of the few emerging market currencies to be higher on the day in response to the shift in policy by the Bank of India.
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