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The Fed has officially entered its particular blackout period and the market verdict just 9 days from the FOMC meeting is that a 25bp rate cut is likely to be the ‘insurance’ rate cut the Central Bank is seeking as a preventive measure. One that did not apply that adjective when giving his speech late Thursday last week was Fed’s NY President Williams, whose overly dovish comments on the US economy led to some USD vol fireworks, with the NY Fed later issuing a note clarifying that what Williams made sound like a 50bp rate cut message, should indeed be played down as the comments should, according to the subsequent note by the NY Fed, be taken only as ‘academics’ and not intended to relate to the Fed’s monetary policy decision on July 31st. One has got to agree that the Fed is suffering from a growing collection of miscommunications during Powell’s era. The USD bearish move pre-Willimas was essentially canceled and things went back where they were as if nothing had happened and the market sees 25bp rate as the most likely outcome now. A currency that finds no respite, as the equally-weighted index below indicates is the EUR, with the ECB mulling further easing and even a potential drop of its inflation goal mandate in light of how erroneous its model (and the rest of global CBs) has been at estimating inflationary pressures. The JPY has started the new week on the backfoot, as news that US-China may arrange in-person meetings with some ‘goodwill’ actions expected, most likely a key factor influencing the poor performance. The Kiwi and the Aussie, especially the former, remain on bullish trends as per the currency indices structures. Surprising to see the Kiwi so strong even if the RBNZ may opt to ease in August. Tells you how tough it is to find a good FX choice out there to diversify into (race to the bottom in easing cycles in full motion). The GBP has been able to find firmer buying interest for over a week as some glimpses of hopes emerge of work being done for the UK and the EU to revisit the Brexit deal once Boris Johnson is confirmed PM later this week (with all likelihood). I leave for last the CAD, with some clear cracks in its technicals, and the CHF, which shows the opposite, as the index broke out of a range.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- Colossal backtracking of the NY Fed: A surprising flip flop from the NY Fed heading into Asian hours of Friday caused most of Fed’s Williams-induced USD selling from late last week to be reversed. The market had initially concluded that a more dovish-than-expected speech by Fed’s NY President Williams, which followed a consistent dovish rhetoric from Fed’s Vice Chairman Clarida, was a clear admission that a 50bp rate cut by the Fed on July 31st was being telegraphed to markets. The messages were especially relevant since the Fed’s blackout period (no further Fed speech) started last Friday. However, the moment officials at the New York Fed issued a correction to the barrage of dovish comments from Williams, saying they were academic in nature and ‘not about potential policy actions at the upcoming FOMC meeting’, it unleashed a run to the exits to buy back USDs as the CME Fedwatch tool swung wildly from 70%+ chance of a 50bp cut to around 30%.
- The WSJ article fits into the storyline: Moreover, what’s been treated like a leaked report that the Fed will only cut its interest rate by 25bp, according to the WSJ, led to see further buying interest on the USD. The title read “Fed Officials Signal Quarter-Point Rate Cut Likely at July Meeting” and as a new week starts, the chances of a 50bp rate cut after the zillion headlines from Fed officials have come down to just 22%. After further inspection of the article, one can clearly conclude that it’s under the context of an opinion piece as the days when newspapers could gain access to such privileged information are, in theory, long gone. Since no more comments from the Fed will occur during the black period, the latest events seem to have set the stage for a more stable USD heading into the FOMC if the current expectations hold. US durable goods orders and adv GDP later on the week represent the only risk events left in the calendar this week to affect the Fed thinking (unlikely), other than any new developments in the US-China trade relationships.
- Market reassured of 25bp as likely path: Last Friday, if anything, the last two Fed speakers lined up, reinforced the notion that a 25bp is now the market’s preferred outcome to support. Boston Fed President Rosengren said the US economy doing quite well with most of the news is quite good, and while recognizing that the economy has definitely stabilized since last year, it’s still strong, which led him to add “I don’t want to ease if economy doing perfectly well.” It’s clear that he is against cuts for now. Even a well-known dovish as is Fed’s St.Lous President Bullard is publicly endorsing a 25bp rate cut instead of a 50bp, which judging by the latest data in the US and the standby in the US-China trade war, does seem to be a sensible approach by the Fed at this point.
- Upside risk in US economic surprise index: The team of Economists at Nordea, who tend to put out some of the best analysis out there, are anticipating that the US economic surprise index runs the risk of heading higher from here, with seasonality starting to look favorable, supported by recent positive surprises such as Empire State, retail sales, Philly Fed and NAHB, NFP. “It does look more and more as the usual patte of stabilisation of pick-up in the US surprise index may have started to play out. Data disappoints and the surprise index weakens in H1, and heads higher in H2.”
- China’s mouthpiece carries some positive news: Global Times Editor Hu Xijin, who’s become an influential source via Twitter as to the current state of affairs in the US-China trade war, wrote some ‘goodwill’ actions may be expected. “Briefing of the Chinese side on phone talks between Chinese and US trade officials shows face-to-face consultation will not be far away. I think we can expect that some actions may happen, which would be seen as goodwill from each other.” If the veracity of the tweet proves to be accurate, that’s a clear positive signal for risk appetite if backed up by evidence. The tweet follows telephone conversations between U.S. and Chinese officials, with U.S. Treasury Secretary Steven Mnuchin suggesting in-person talks could follow, as Reuters reports.
- Tensions in Iran not ceasing: Iran captured a British oil tanker off the Strait of Hormuz on failure to follow maritime rules. Oil prices saw a minor bounce, insufficient to shift the bearish sentiment that prevailed last week. A statement from the UK govement noted ‘urgently seeking further information’ on the tanker. The slump in Oil last week, which has a notorious effect on inflation expectations at a time when global central banks such as the ECB, FED are coming to terms about the inefficiency of their current models to assess protracted low inflation, is partly due to renewed hopes that the US and Iran may be mulling a retu to the drawing table. According to a report by Al-Monitor, Iran’s Foreign Minister met with US Senator Rand Paul on July 18th to feel out appetite to resume talks. The fact that Paul is part of the committee on foreign relations along with the approval by President Trump to let Paul ‘test the waters’ on the Iranians to bridge differences, suggests the headlines carry substantial credence to keep influencing Oil.
- Poor Canadian retail sales: The Canadian Dollar was mark-down quite aggressively last Friday as Canada’s May retail sales missed badly at -0.1% vs +0.3% expected, with sales down in 4 of 11 subsectors. The combination of poor fundamental data and falling Oil prices was always going to be a tall order for the CAD to sustain the excess of supply coming into the market. Not to be forgotten, the CAD index, as I’ve reiterated in multiple occasions last 2 weeks, had reached a macro resistance where market makers and smart money, in general, would be keen to add short-side pressure. Since July 11th, the Canadian bond yield curve has entered into a bull steepener, which occurs when short-dated bond yields fall faster than longer-maturity paper, signaling that the market is starting to price in a potential shift towards a more dovish rhetoric by the BOC. The 2-year bond yield is down more than 20bp since its peak on July 8th, last at 1.46%.
- No one wants a hard-Brexit: The UK Sunday Times reports that there is no appetite from either the EU or the UK to end with a no-deal Brexit, and for this reason, the newspaper published on its weekend edition, citing unnamed sources that EU officials are looking to work with likely new UK PM Johnson to kick start talks on a new Brexit plan to avert a no-deal exit. The report goes on to say that senior EU politicians all have already established contact with Johnson’s team. The more the talk of reopening venues that may lead to a softer Brexit, the more appealing the GBP looks at these low levels for some models macro models that assess the evolving risks of Brexit.
- Soon to be UK PM takes constructive tone: Boris Johnson, as a regular columnist of the UK newspaper The Telegraph, put out his latest thoughts on Brexit, by sending a message to the EU about one of his envisioned outcomes to be for the UK to leave the European Union by agreeing on a free trade agreement with a compromise reached on the Northe Irish physical backstop hoping the technology is factored into the equation. Boris noted that “there is abundant scope to find the solutions necessary – and they can and will be found, in the context of the Free Trade Agreement that we will negotiate with the EU … after we have left on October 31… We can come out of the EU on October 31, and yes, we certainly have the technology to do so. What we need now is the will and the drive.”
Recent Economic Indicators & Events Ahead
A Dive Into The Majors (Tech, Funda, Intermarket)
EUR/USD: Bulls’ Quick Round Trip Courtesy Of NY Fed
GBP/USD: Lack Of Demand/Supply Excess Results In Unclear Bias
USD/JPY: Bearish Structure Negated After NY Fed-Induced Recovery
AUD/USD: Uptrend Still In Place, Order Flow Bullish
USD/CAD: Playing Range Paying Dividends, Downside Clearest Value Opportunities
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