Dollar Broadly Weaker In Wake of FOMC Decision

Dollar Broadly Weaker In Wake of FOMC Decision

  • The dollar remains on its back foot in the wake of the FOMC decision
  • The biggest gains are being enjoyed by the dollar bloc and EM.
  • Japan reported department store sales for August
  • During the North American session, the US reports August leading index and Canada reports August CPI
  • Brazil reports monthly GDP proxy for July; Peru central bank releases its quarterly inflation report

Price action:  The dollar is broadly lower in the wake of the FOMC decision.  The dollar bloc is outperforming, while the Scandies and the euro are underperforming.  The euro is so far unable to build on yesterday’s gains and is trading near $1.1435, while cable is trading pushing above $1.56 before running out of steam near $1.5660.  Dollar/yen is moving further below 120, and is likely to test the 119 area.  EM currencies are firmer.  MYR, INR, and ZAR are outperforming while RUB and the CEE currencies are underperforming.  MSCI Asia Pacific was up 0.3%, despite the Nikkei shedding 2%.  Chinese markets rose, with the Shanghai Composite up 0.4% and the Shenzen Composite up 1.3%.  Euro Stoxx 600 is down 1.6% near midday, while S&P futures are pointing to a lower open.  The US 10-year yield is down 4 bp to 2.15%, while European bond markets are mostly firmer.  Commodity prices are mostly higher.

  • The dollar remains on its back foot in the wake of the FOMC decision Thursday.  Yet the losses are fairly limited.  The euro pushed higher to around $1.1450 yesterday, and it basically sits there today.  Cable is trading at its highest level since August 26 and is eyeing the August highs near $1.58.
  • The biggest gains are being enjoyed by the dollar bloc and EM.  Yet ironically, it is these countries that are most vulnerable to the global concerns (i.e. China) that kept the Fed from hiking in the first place.  The Aussie was further aided by comments from RBA Governor Stevens, who said he was “pretty content” with the current Australian interest rate level.  We’d note that an RBA interest rate that’s appropriate for 7% China growth may not be appropriate for 6% China growth.
  • EM currencies have gotten a reprieve.  Expect some further gains, as we think it will take a few days for the dust to settle.  Overall, we’d stress that the Fed’s lift-off has been delayed, not cancelled.  With the ECB and BOJ still thought to have more stimulus on tap, the conditions for a continued dollar rally remain in place.
  • It’s worth reviewing the Fed’s new “Dot Plot” from this meeting.  Median projection for 2015 Fed Funds fell to 0.375% from 0.625% in both June and March, suggesting only one hike this year instead of two.  Median projection for 2016 fell to 1.375% from 1.625% in June and 1.875% in March.  Median projection for 2017 fell to 2.625% from 2.875% in June and 3.125% in March.  Over the long run, the median projection fell to 3.5% from 3.75% in both June and March.
  • US rates market has reacted as one would expect.  The 2-year US-German spread has collapsed below 90 bp from 103 bp Wednesday.  The implied yield on the December 2016 Fed Funds futures contract fell 11 bp to .76% yesterday and has fallen by another 3.5 bp to 0.725% today. That compares to the Fed’s “Dot Plot” median of 1.375%, so the market is still nearly 75 bp below where the Fed is.
  • On the other hand, the equity markets have not rallied as much as one would expect.  MSCI Asia Pacific was up slightly, while European stocks are down near midday and S&P futures are pointing to a lower US open.  Why the disconnect with FX and rates markets?  Perhaps equity markets are taking the Fed statement about global growth risks more seriously than other markets.  We suspect markets in general will start paying more attention to China economic data rather than US data.  After all, the Fed basically said that domestic conditions warranted lift-off yesterday.
  • Japan reported department store sales for August.  Nationwide sales rose 2.7% y/y vs. 3.4% in July while Tokyo sales rose 6.1% y/y vs. 7.2% in July.  After the BOJ left policy steady this week, many observers see possible action at the next meeting in October.  Dollar/yen has broken below the 120 area and is likely to test the series of early September lows between 118.60 and 118.90.
  • During the North American session, the US reports August leading index (0.2% m/m consensus) and Canada reports August CPI (1.3% y/y headline consensus).  Good US jobless claims number was reported yesterday at 264k vs. 275k expected.  This is for the BLS survey week that goes into the NFP data, and suggests continued strength in the labor market.  The 13-, 26-, and 52-week averages for initial jobless claims all continue to fall to new cycle lows, at 274k, 275k, and 284k, respectively.
  • Brazil reports monthly GDP proxy for July, and is expected at -4.6% y/y vs. -1.2% in June.  The economic outlook is worsening, which will keep pressure on the fiscal outlook.  BRL underperformed Thursday on press reports that Lula and the PT are planning to boost growth by cutting interest rates and increasing public spending.  Finance Minister Levy and central bank President Tombini would reportedly be replaced.  USD/BRL made a new cycle high near 3.9075 Thursday, and the all-time high near 4 is within sight.  The real lagged yesterday, and domestic factors suggest it will continue to underperform within EM.
  • Peru central bank releases its quarterly inflation report.  This will be very important after the bank hiked rates unexpectedly last week.  The report will hopefully shed some light on what sort of tightening cycle the bank expects to unfold.  Growth is starting to pick up, which clearly gave the bank confidence to hike rates.