US Dollar Stumbles, Some Stormclouds
Speeches from various Fed members comprised a coordinated message of pausing rate hikes and the US dollar was the clear victim. The New Zealand dollar was the top performer, closely tracked by Gold on Wednesday, while EUR finally regained and closed above 1.1500. News of FITCH warning about a possible downgrade in the AAA rating of the United States has also weighed on USD. [ More on this below ]. Economic data could put the focus back on te slowing economy. The Long Dow Premium issued on Friday has hit its final target of 23930 for 770-pt gain. Now the questions start as to will we go short, what to go short or what to re-enter the long.
Fed speakers and the FOMC minutes on Wednesday removed any doubt about a shift to the sidelines. Commentary from Evans, Bostic and Rosengren on Wednesday all shifted dovishly with the latter even suggesting the Fed could cut if the outlook deteriorated. The FOMC minutes were much more dovish than Powell indicated in the December press conference in another sign of a shift.
Ultimately, the latest rhetoric strongly suggests the Fed will be on hold in Q1 and probably through Q2 at the minimum. The dollar slumped throughout the day including a 100 pip rally in EUR/USD and USD/JPY falling by 80 pips.
The Bank of Canada left rates on hold but didn't switch to a completely neutral stance. Poloz shifted guidance to say rates will need to rise 'over time', implying there is no rush to hike. It wasn't as dovish as feared and USD/CAD fell for the seventh day. A big part of the fall was due to another 5% rise in oil prices and the weak US dollar. Add to that the accelerating rally in indices.
In the bigger picture, the S&P 500 climbed for the fourth day but there are some storm clouds. Some final headlines from the US-China meetings suggested sides are far apart on government subsidies to Chinese state companies. The deepening impasse between Trump and Democrats over Wall funding did not help. Economic data could also unwind some of the optimism. The German numbers earlier in the week were extremely weak and talk of a recession in Germany, Italy and France is beginning to percolate.
About that Fitch WarningYesterday, Fitch warned of a possible cut to the US AAA rating in the event of a continuation of the shutdown impasse. Ashraf tells me the downgrade will likely materialize when the shutdown morphs into an ugly debt ceiling fight later this quarter. Why ugly? Because today's split in Congress is stark enough...just as stark as it was in summer 2011 -- the year of the Debt Ceiling fight which ultimately led to S&P lowering the US AAA credit rating. We all know what happpened to the markets in August-Sep 2011. Don't forget there is also Brexit that month.
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