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Dollar Mixed on Central Bank Thursday

  • As expected, the Fed cut rates by 25 bp; the dollar firmed after the decision but has since given back some gains
  • During the North American session, there will be a fair amount of US data
  • BOE is expected to keep rates steady; UK reported August retail sales
  • SNB and BOJ kept rates steady, as expected; Norges Bank unexpectedly hiked 25 bp
  • Brazil cut rates 50 bp to 5.5%; Indonesia cut rates 25 bp to 5.25%; Taiwan kept rates steady at 1.375%; SARB is expected to remain on hold

The dollar is mixed against the majors in the wake of the FOMC decision. Swissie and yen are outperforming, while the Antipodeans are underperforming after weak data prints. EM currencies are mixed too. The CEE currencies are outperforming, while TRY and SGD are underperforming. MSCI Asia Pacific was down 0.1% on the day, with the Nikkei rising 0.4%. MSCI EM is down 0.5% so far today, with the Shanghai Composite rising 0.5%. Euro Stoxx 600 is up 0.4% near midday, while US futures are pointing to a lower open. 10-year UST yields are down 1 bp at 1.79%, while the 3-month to 10-year spread is unchanged at -13 bp. Commodity prices are mostly higher, with Brent oil up 2.4%, copper flat, and gold up 0.2%.

As expected, the Fed cut rates by 25 bp to a range of 1.75-2.00%. The FOMC was split on the need for more easing and so overall, we’d characterize this as less dovish than expected. Some were looking for a 50 bp cut or for signs of further cuts but we got neither. The Fed was generally upbeat on the economic outlook but noted some downside risks. Chair Powell pledged to act as needed and stressed that if the economy weakens, more extensive rate cuts may be needed.  However, we believe he downplayed the need for further easing.

Powell also downplayed recent funding pressures as a technical problem. He sees no impact on the real economy and felt that the stresses took most by the surprise, even the market experts. Powell acknowledged that the Fed will have to revisit the notion of increasing the size of its balance sheet. He did take pains to stress that it would be “organic” and technical with no policy implications. As such, markets shouldn’t expect QE4.

The dollar firmed after the decision but has since given back some gains. We are disappointed with the price action, as the less dovish Fed should be giving the greenback a bigger boost. We remain dollar bulls but acknowledge that it may take a little while for markets to fully digest the Fed’s decision. For instance, WIRP suggests 41% odds of another cut October 30. This clearly overstates the case in light of Powell’s tone yesterday.

The media embargo has ended and so Fed officials will fan out in the days ahead. Williams, Rosengren, and Kaplan all speak tomorrow and there is a full slate of speakers next week. Given the stark split at the Fed, markets should be prepared for a wide range of views in the coming days. However, we believe Powell’s balanced approach holds sway at the moment. The Fed could cut again, but we think the bar is high.

We usually don’t put a lot of weight on the Dot Plots but the latest composition is worth discussing. 8 on the FOMC see one more cut to 1.675% by end-2020, 2 are right at the current 1.875%, 6 are at 2.125%, and 1 is at 2.375%. We wonder who those 8 are that see one more cut.  Are they voters? We assume Kashkari (non-voting uber-dove) is one of them. Bullard (voter) too, since he dissented in favor of a 50 bp cut. Something to think about ahead of the next meeting.

During the North American session, there will be a fair amount of US data. Philly Fed survey is expected at 10.5 vs. 16.8 in August. Manufacturing remains vulnerable, but this is just one sector of the economy. Q2 current account, weekly jobless claims, August leading index, and existing home sales will all be reported too. The claims will be of interest since they are for the BLS survey week containing the 12th of the month.

The US economy remains in solid shape. The Atlanta Fed’s GDPNow model is tracking 1.9% SAAR growth in Q3, up from 1.8% previously. This is near trend (~2%) as well as the revised 2.0% SAAR in Q2. Elsewhere, the NY Fed’s Nowcast model is tracking 1.6% SAAR growth in Q3. Its forecast for Q4 growth remains at 1.1% SAAR. Unless there is a sharper drop-off in the growth outlook, we do not think the Fed is in any hurry to cut again.

Bank of England is expected to keep rates steady. The bank is clearly on hold until the Brexit outlook becomes clearer. WIRP suggests less than 2% odds of a cut today, rising to 15% November 7 and 24% December 19. Ahead of the BOE decision, UK reported August retail sales. Headline fell -0.2% m/m vs. the flat reading expected while ex-auto fuel fell -0.3% m/m, as expected. July data had come in mostly firmer than expected, but August has been disappointing.

Swiss National Bank kept rates steady at -0.75%, as expected. However, the bank tweaked its tiering policy to give banks some relief from negative rates. The SNB won’t impose charges on amounts up to 25 times minimum reserves starting November 1, up from 20 times previously. This either sets the table for the bank to go more negative or to keep negative rates in place for longer. SNB also cut its growth forecast for this year to 0.5-1.0% from around 1.5% previously.

Norges Bank delivered a hawkish surprise and hiked rates 25 bp to 1.5%. No change was expected. After the lower than expected CPI print for August, markets had dialed back tightening expectations.  However, NOK pared its gains after Governor Olsen said that “The executive board’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at this level in the coming period.”

Bank of Japan kept rates steady, as expected.  There were two dissents, with one in favor of lower rates and one in favor of changing forward guidance that currently sees current policy through at least spring 2020.  The consumption tax hike goes into effect October 1.  As such, the BOJ will likely wait to gauge the potential impact on the economy before moving again.  WIRP suggests 59% odds of a cut October 31 and 100% December 19, both up sharply from the end of last week.

Australia reported August employment data.  Headline gain of 34.7k looked good, but it was boosted by a 50.2k gain in part-time jobs.  Full-time jobs fell -15.5k, while the unemployment rate ticked up to 5.3%.  WIRP suggests 80% odds of a cut October 1, up from only 22% at the end of last week.  AUD has retraced over half of the September rally and a break of the .6765 would up a test of the September 3 low near .6690.

New Zealand reported Q2 GDP data.  Growth came in at 2.1% y/y vs. 2.0% expected and 2.5% in Q1.  WIRP suggests 16% odds of a cut September 25, up from 11% at the end of last week.  NZD is leading the drop in the Antipodeans, as it has retraced over 75% of the September rally and is on track to test the September 3 low near .6270.

Brazil COPOM cut rates 50 bp to 5.5% last night, as expected.  The decision was unanimous, and COPOM said the next steps will depend on activity, risks, and inflation.  IPCA consumer inflation rose 3.4% y/y in August, in the bottom half of the 2.75-5.75% target range.  Meanwhile, the economy remains sluggish.  Markets are pricing in a 50 bp cut in Q4 that would take the policy rate down to 5.0%.  This could be a risky move, as the risk premium paid for holding Brazil assets would be nearly non-existent.

Bank Indonesia cut rates 25 bp to 5.25%, as expected.  A handful of analysts saw no cut.  The bank also announced a series of macroprudential measures that are meant to boost bank lending.  CPI rose 3.5% in August, right in the middle of the 2.5-4.5% target range.  With growth expected to remain sluggish, we expect easing to continue into next year.  Next policy meeting is October 24 and another cut is possible then.

Taiwan central bank kept rates steady at 1.375%, as expected.  Governor Yang noted that policy remains “moderately loose” and that the bank hasn’t considered a preventive rate cut.  Taiwan reports August export orders Friday, which are expected to contract -2.6% y/y vs. -3.0% in July.  The entire region continues to suffer from the US-China trade war.  Until tariffs are eliminated, those negative impulses are likely to continue.

South African Reserve Bank is expected to keep rates steady at 6.5%.  A handful of analysts look for a 25 bp cut to 6.25%.  We see risks of a dovish surprise, especially as the rand has held up well recently.  CPI rose 4.3% y/y vs. 4.2% expected, while July retail sales rose 2.0% y/y vs. 2.6% expected.  Inflation remains in the bottom half of the 3-6% target range while the real economy remains weak.  If not today, then a cut is likely at the next meeting November 21.

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About Win Thin
Win Thin
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH
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