by Marc Chandler
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Overview: The Federal Reserve's 50 bp rate cut has made for a volatile 15 hours or so in the foreign exchange market. As North American traders return to their posts, the greenback is heavy. They will find that only the yen and Russian ruble are softer. Norway delivered a hawkish hold, and the krone leads the G10 currencies with more than a 1% gain. Australia's employment data was sufficiently strong that the Reserve Bank of Australia will likely reiterate its hawkish hold stance and the Aussie is up 1% to be flirting with the year's high.
Although US equities settled lower yesterday, the Fed's move sent global equities higher, and the US index futures are trading sharply higher. In the Asia Pacific region, Japanese and Hong Kong indices rose by more than 2% to lead the region. Europe's Stoxx 600 is up 1.2%, which is sustained would be the largest advance in a little over a month. Benchmark 10-year yields rose in the Asia Pacific region and are mostly a little higher in Europe. The 10-year Treasury yield is flat near 3.70%. Gold remains within spitting distance of the record-high set yesterday near $2600. November WTI is extended its recovery from below $65 last week. It is straddling $71, with the weaker dollar and a widening war in the Middle East lending support. It has not settled above $70 this month, yet.
Asia Pacific
Australia's August employment report was sufficiently robust to allow the central bank to maintain its hawkish hold when it meets next week (September 24). Employment growth was little changed after revisions, with 47.5k jobs created after a revised 48.9k in July (from 58.2k initially). Through August, it has created the same number of jobs as it did in the first eight months of 2023 (~311k). Of those jobs 240k were full-time posts this year compared with 216k in the same period last year, though it lost 3.1k full-time positions in August. The job creation is falling short of the participation increase, and as a consequence the unemployment rate has been trending higher. It was at 3.7% as recently as February and rose to 4.2% in July, where it remained in August. Japan reports August CPI first thing tomorrow. The Tokyo CPI, which was released a few weeks ago, indicates the national pace likely ticked up, with the headline expected to 3% after a 2.8% reading in July. The core measure is projected to rise to 2.8% from 2.7%, and the measure that excludes fresh food and energy expected to be at 2.0% from 1.9%. The BOJ meeting concludes a few hours after the CPI release. Another hawkish hold is likely.
The dollar fell on news of the Fed's 50 bp rate cut and made new session lows during Fed Chair Powell's press conference. The dollar fell from around JPY142 before the announcement and to slightly below JPY140.50, slightly above Tuesday's low. But the markets reversed, rates rose, stocks fell, and the dollar recovered. The greenback surged to new a new nine-day high near JPY143.95 in a dramatic scramble in early Asia Pacific turnover, where it met a wall of sellers that sent it back to JPY142.00 It is near the middle of the range late in the European morning. The Australian dollar was little changed before the FOMC announcement (~$0.6765), shot up to $0.6820 to approach the seven-month high set in late August. It then proceeded to fall to a new session low slightly below $0.6845. Demand for US dollars in early Asia Pacific trading saw the greenback briefly trade below $0.6740, where A$1 bln options expire there today. It rebounded and the Aussie is trading near the year's high set in January near $0.6840. The US dollar is trading at new lows for the year against the offshore yuan, near CNH7.06. There is little on the charts ahead of CNH7.0. The PBOC set the dollar's reference rate at CNY7.0983 (CNY7.0870 yesterday).
Europe
The central bank of Norway's meeting has already concluded. As widely expected, it stood pat. It continues to push against speculation it will cut rates in Q4. It did signal that its monetary easing cycle could begin in early 2025. The market responded accordingly. Yesterday, the swaps market had a quarter-point cut fully discounted for December and now the odds are closer to 60%, the least since July. The Bank of England's announcement is expected shortly. The consensus is no hike now, but at least 50 bp of cuts this year still and 75-100 bp in the first half of next year. Yesterday's report showed August CPI rose by 0.3% and the three-month annualized rate is less than 1%. The core measure ticked up (3.5% vs. 3.3%) and service inflation is still problematic (5.6% vs. 5.2%). The moderation in wages is expected to allow service inflation to moderate. The economy unexpected stagnated in July for the second consecutive month. A case for a rate cut may be made by an MPC member or two in dissent. Recall that the UK economy contracted in H2 23, led the G7 in growth in H1 24. The BOE projected growth of 0.4% in Q3, but this may be at risk. The BOE is also expected to announce that it will allow GBP100 bln to roll off its balance sheet next year. The UK reports August retail sales tomorrow. They have posted a monthly average gain of 0.6% through July, which includes the heady (3.8%) rise in January after slumping 3.5% last December. They are expected to have risen by 0.3% in August after a 0.5% gain in July.
The euro spiked to almost $1.1190, a new high for the month after the FOMC decision. The gains unwound and in the chaotic position adjustment ensued, the single currency dipped briefly below $1.11, where 2.5 bln euros in options expire today and another 1.8 bln euros on Friday. It managed to settle slightly above Tuesday's low (~$1.1110) but was sold to $1.1070 in the Asia Pacific session before rebounded to $1.1175 in the European morning. There are nearly 1.9 bln euros in options at $1.12 that expire today. The intraday momentum indicators are overbought. For its part, sterling jumped to a new high since March 2022 of almost $1.33 in the immediate aftermath of the Fed's announcement. It also unwound the gains in full and returned beyond the status quo ante to around $1.3155 before recovering back to almost $1.3290 in European turnover today. There are options for GBP530 mln at $1.33 that expire today. Sterling would bear the burden of an unexpected rate cut.
America
The Federal Reserve's 50 bp rate cut kicks of an easing cycle that officials anticipate will extend into 2026. The median projection by Fed officials anticipates the terminal rate to be 2.75% to 3.0%. The Fed's median dot anticipates another 50 bp cuts this year, but the futures market has about another 75 bp discounted (implying the risk of another 50 bp reduction). The median dot is for Fed funds to be at 3.25-3.50% at the end of next year. The futures pricing is consistent with 2.75%-3.0%. Canada reports July retail sales tomorrow. A 0.6% increase is expected after the 0.3% decline in June. Auto sales were a drag in June. Without them, retail sales would have risen by 0.3%. Auto sales look to have bounced back in July. Without them, retail sales may have increased by the same 0.3%. Still after the outright decline in August CPI (-0.2%), the uptick in retail sales is unlikely to dissuade the market from expecting that the Bank of Canada will match the 75 bp of cuts it has delivered between so far this year in Q4. There are only two meetings. The market is divided over whether a 50 bp cut is delivered at next month's meet (October 23) or the last meeting of the year (December 11), but after the Fed moved, the market upgraded the chances of a 50 bp cut in October to about 68% (from ~55% at Tuesday's close and ~35% at the end of last week).
The greenback was hovering around CAD1.36 and slumped to almost CAD1.3540 on the Fed's announcement, which had not seen since the employment data on September 6. And by the time the press conference ended, it had risen to a new session high a whisker shy of CAD1.3625 to match the month's high. However, the settlement was back inside Tuesday's range. Today, the US dollar is posting a big outside down day. It reached nearly CAD1.3650 before reversing. It has slipped through yesterday's low. A close below it, and ideally CAD1.3520 would target the late August low near CAD1.3440. That said, the intraday momentum indicators are stretched. The Mexican peso has been spared most of the volatility. US dollar trended higher against the Mexican peso steadily in North America yesterday approach Tuesday's high (~MXN19.40) after trading below MXN19.07 in Europe, a new low for the month. However, after the Fed's move the dollar fell back to MXN19.15. The greenback recovered to settle a little below MXN19.29. Today the greenback has been confined to a roughly MXN19.17-MXN19.31 range. Among emerging market currencies, only the Russian ruble's drop exceeded the peso's 0.9% decline yesterday. Leading emerging market currencies higher was the Colombian peso (~0.70%) and the Brazilian real (~0.45%) before the decision to hike the Selic rate by 25 bp (to 10.75%) was announced.
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