Intraday Market Thoughts

USD Dead Cat Bounce, BoC Preview

by Adam Button
Sep 6, 2017 9:48

The US dollar took another tumble to start the week, we look at five reasons why it was the worst performer on the day. Aussie is the worst performer after weaker than expected GDP figures. Before we look at today's BoC decision, here's a quick explainer on the latest USD damage. Below is the latest trading/charts video for Premium subscribers ahead of the ECB and BoC.

1) The bid in bonds

Treasury yields were an early signal as they tumbled right across the curve. Ten-year yields fell 10 basis points to 2.06%, which definitely breaks the June low and is the lowest since the US election. Low yields make US debt less attractive.

2) More bad data

Following Friday's release of the triple negatoive in the US jobs report (weaker NFP, higher unemployment rate and lower earnings), US factory orders hit 4-year lows, shedding fresh doubts on the role of manufacturing.

3) Brainard, Kashkari & Kaplan

The Fed's Brainard argued for patience and prudence before raising rates and so did Dallas Fed's Kaplan. Brainard is a well known dove but she has also been a swing voice in the past. As a Governor, she is more of a core FOMC member than others who don't want to hike like Minneapolis Fed's Kashkari and St Louis Fed's Bullard. Minneapolis Fed's Kashkari from his part said recent Fed hikes may have been "harmful" to the economy and that inflation may be a "ghost".If Dudley makes a similar point on Thursday, the dollar will fall further.

4) North Korea

Risk aversion dominated on Tuesday but that isn't necessarily a bad thing for the dollar. As the S&P 500 fell 20 points, the fears helped to reel in USD/CAD and AUD/USD. The problem for the dollar isn't so much the fear of nuclear war but the potential for it to turn into a trade dispute with China.

5) Hurricane Irma

Hurricane Irma is a massive Category 5 storm that will be a major disaster in Puerto Rico in the day ahead. Its sustained winds are near 300km/h, which is very close to the strongest ever recorded for an Atlantic storm. It's all the talk in the energy market but it's not getting as much noise in FX, despite huge risks to Florida, the Gulf or the eastern seaboard. A second disaster would ratchet up the costs and deliver another blow to Q3 growth.

5) Congress

US lawmakers have a daunting schedule in the weeks ahead. They have a half-dozen true urgent matters to deal with this month, plus Harvey relief and potential Irma relief. The market has little faith it will all get done without a disruption.

Today's big central bank event that will cause major waves is the Bank of Canada decision. The market is truly perplexed on what will happen. The OIS market is pricing in a 43% chance of a hike but believes that even if it comes, there will be some kind of signal that the BOC will head to the sidelines afterwards. The risk – as it was in July – is a hawkish hike. But would they be hurried into a hike when oil fundamenta'ls remain bearish and the currency is already near multi-year highs?


Latest IMTs