Morning Commentary: Odd Man Out

Foreign Exchange - Morning Commentary
Odd Man Out
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Yesterday, the Fed delivered the rate cut that everyone was expecting but there were three dissenting votes against the move. This is one more dissenting vote than last month. Fed Chairman Powell bobbed and weaved through a series of questions and the net result was a bump higher in U.S. interest rates and a stronger U.S. dollar late into the session. The probability of a Fed rate cut before the end of the year remains near 65%.

Markets have been digesting the Fed’s response along with other economic data and other central bank monetary policy meetings today. Global equities are steady to higher, G7 interest rates are back down again and oil and energy prices are higher again today. The U.S. dollar (DXY) has given back some of its overnight gains but is mixed overall.

This morning, the OECD cut their economic forecasts for 2019 that were just made four months ago. They cut their global growth projection from 3.2% to 2.9%. As global growth and trade volumes have weakened due to the tariffs and the continuing trade war, central banks have responded with lower interest rates. In July, eight central banks cut rates and in August, 14 central banks have cut interest rates. In September, both the Fed and the ECB have cut along with other emerging market central banks. There has been a clear pattern among major and emerging central banks for most of this year.

The odd man out is the central bank of Norway. They surprised the markets today and raised interest rates today by 25 bps to 1.50%; this is the fourth rate increase this year. This is an economy unlike many others that is bumping up against its capacity limits amid a surge in oil investments and a generous fiscal policy providing tax cuts and infrastructure spending. While the rate increase today was a surprise, the commentary from the central bank implied that they would be on hold for the time being as they monitor global developments.
  • Australia posted their August Jobs report and it was disappointing. While the headline gain of 34,700 widely beat expectations, full-time jobs declined by 15,500 while part-time jobs gained 50,200. In addition the UR ticked higher to 5.3%. Market expectations for an RBA rate cut on October 1, have risen to near 80% from 22% just a week ago. Aussie interest rates and the Aussie dollar are both weaker.
  • The Bank of Japan kept interest rates unchanged at -0.10% as was widely expected. There continues to be a bias toward lower interest rates and more monetary accommodation but the government’s consumption tax goes into effect October 1 and as such, the Bank of Japan will likely wait to gauge the potential impact on the economy.
  • The Bank of England left rates unchanged as was expected at 0.75%. The vote was unanimous at 9-0 but the central bank acknowledged shifting downside risks globally. They also spoke toward the continuing Brexit uncertainty with both potentially lower growth and inflation. The British pound remains confined to similar ranges over the past four days and near its most recent highs.
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