Morning Commentary: Equilibrium

Foreign Exchange - Morning Commentary
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, markets in general are largely where we had left them last night with equities, interest rates, and currencies remaining stagnant for the time being. It would appear that investors and traders are largely watching from the sidelines as we have reached a near term equilibrium point as the market weighs numerous factors. Among the key factors that have brought us to this static point are the following:
  • Markets turning optimistic again and adapting a “risk-on” psychology brought about by the renewal of the U.S. – China trade talks as they await the October meeting in Washington with hopes for a breakthrough of some kind.
  • Markets have discounted the likelihood of the FOMC cutting interest rates by 50 bps with nearly 100% certainty of a 25 bps cut next week; U.S. interest rates have rallied higher over the last several trading days and interest rate inversions have subsided.
  • No new developments on Brexit with Parliament suspended until October 14; a U.K. bill forcing an extension to prevent a hard Brexit from becoming law along with Parliament preventing a call for early elections has brought some near term stability to the Brexit crisis.
  • Markets and investors are awaiting the key ECB meeting on Thursday and the FOMC meeting on the following Wednesday.

All of this can change in a moment’s notice, but for the next 48 hours, we anticipate more of the same with consolidation and range bound markets.
  • China’s State Administration of Foreign Exchange (SAFE) scrapped foreign investment limits in local stock and bond markets. This is a clear signal that policymakers want to encourage more capital inflows while remaining vigilant and worried about capital outflows. The Chinese yuan is slightly higher on the session.
  • The British pound (GBP) is the top performing major currency this morning. Yesterday’s better-than-expected economic data combined with a good U.K. jobs report this morning have brought some much needed near term stability for this currency. The U.K. UR fell from 3.9% to 3.8%, and average weekly earnings rose sharply from 3.7% to 4.0%. U.K. 10-year yields are up by 28 bps since last week, and the GBP is at its best levels in three weeks.
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