Dollar on edge before Fed meet, all eyes on policy outlook
The dollar was fragile in Asian trade on Tuesday as markets speculated growth worries will prompt the Federal Reserve to signal a pause to its monetary tightening cycle at this week’s meeting.
Asian equities were hit hard after a rout on Wall Street overnight following a drum roll of weak data globally, reinforcing bets the Fed’s widely expected rate hike on Wednesday would usher in a slowdown, or even a pause, to three years of steady rate increases.
“We are expecting a dovish hike by the Fed. The data has not been tepid enough for the central bank not to hike in December,” said Rodrigo Catril, senior currency strategist at NAB.
Senior Fed officials, including Fed Chairman Jerome Powell, have recently become more cautious about the policy outlook that underlined a shift in market sentiment from a few months ago on rising signs of a slackening in the global economy.
While the U.S. central bank’s latest median dot plot projections from September indicated its willingness to raise rates three times in 2019, the interest rate futures market is pricing in only one more rate hike for 2019.
This mismatch largely reflects a belief that higher U.S. borrowing costs will likely hurt U.S. growth and ultimately force the Fed to hit the pause button on its monetary tightenings.
The U.S. economy, which has been growing strongly this year, has started to show signs of fatigue, adding to growing evidence elsewhere including in Europe and China of cooling momentum.
Yet it may not be all gloom for the greenback. Some analysts think dollar strength can return if the Fed remains relatively confident about next year’s monetary tightening path.
“Most investors expect the central bank to be less hawkish so if the Fed makes it clear that further rate hikes are needed and there’s still scope for 3 rounds of tightening, the dollar will soar regardless of Powell’s concerns about the economy,” said Kathy Lien, managing director of currency strategy in a note.
The dollar index was marginally lower at 97.08 after losing 0.4 percent on Monday.
In a tweet overnight, U.S. President Donald Trump took another swipe at the Fed’s expected rate increase this week, saying it was ‘incredible’ for the central bank to even consider tightening given the global economic and political uncertainties. The markets, however, looked past Trump’s now-familiar comments on the Fed.
The yen gained about 0.3 percent on the dollar as investors’ fears of slowing global growth increased demand for safety assets. The Swiss franc, another safe haven, also tacked on 0.1 percent.
“The Japanese yen and Swiss franc are likely to take on the mantle of safe havens from the greenback for the time being,” NAB’s Catril said.
Yen traders are also focusing on the Bank of Japan’s meeting on Dec. 19-20, at which it is widely expected to keep policy ultra-loose as inflation remains well below its target.
The euro was up marginally at $1.1350, having recovered all of its losses from Monday when it was hit by weak euro zone data.
Sterling, which has been heavily sold off in the past few months on Brexit uncertainty, held steady at $1.2622.
Commodity currencies such as the Canadian dollar and Norwegian crown were under pressure as oil prices tumbled overnight on signs of oversupply in the United States and on demand concerns stoked by the slowing global economy.
The Canadian dollar was fetching $1.3413 on the U.S. currency, down 0.06 percent.
The kiwi, on the other hand, firmed to $0.6845, buoyed in part by improved business confidence data.
An ANZ bank survey showed that firms turned a lot less pessimistic on the economy in December, while becoming more upbeat on their own prospects.
The kiwi had fallen sharply on Friday after the Reserve Bank of New Zealand (RBNZ) said it was considering almost doubling the required capital banks would need to hold in order to better safeguard financial system resilience.
GBP/USD Trades Flat Amid Lack Of Brexit Progress & Silent Macro Calendar
Brexit progress has stalled and economic calendar is wearing down ahead of the Christmas holidays, leaving the Cable to spiral out.
GBP/USD is getting more comfortable on higher ground as the drama around Brexit is not as intense as it used to be. GBP/USD is trading just north of 1.2600 heading into Tuesday’s main trading sessions, but bidding interest in the Sterling looks relatively low making broad based US Dollar weakness as sole driver of momentum. UK Prime Minister Theresa May delivered a fresh round of talking points on Brexit before the UK’s parliament on Monday, but little new developments were delivered.PM May also announced that she will be withholding her current Brexit proposal from a parliamentary vote until mid-January while her camp is trying to use last minute rush as an opportunity to force no-voters into supporting her as there would be little chance to negotiate alternative deal owing to existing deal’s pending approval.
PM May Intentionally Sabotages Brexit Progress
Mrs. May’s intentional sabotage of the Brexit time line has seen the Labor opposition party’s leader, Jeremy Corbyn, put forward a motion for a parliamentary no-confidence vote in PM May’s government, but that measure will also not be appearing until January, and the Cable is set to grind it out through the Christmas holiday season as investors await plenty of action to come in the new year. As of writing this article, GBPUSD pair is trading flat at 1.2626 up by 0.08% on the day. Investors are maintaining cautious tone ahead of tomorrow’s key event US FOMC update which will decide medium term outlook of dollar based on the outcome. However investors will have short term opportunity during US market hours owing to release of US Building permits and housing starts data.
When looking from technical perspective, the GBP/USD pair stays at risk of falling further. In the 4 hours chart, the price is currently struggling with a 20 SMA that lost its early upward strength, while the 200 EMA in the same chart continues gathering downward momentum far above the current level, now at around 1.2780. Technical indicators lack directional strength around their mid lines, with the Momentum still developing below the 100 level, indicating absent buying interest. The pair could gain some ground on a break above 1.2686 the high set last Thursday, yet gains beyond 1.2700 seem unlikely as long as Brexit chaos prevails. The bearish potential will increase short-term on a break below 1.2590, the session low and the immediate support.
Stock Market News
U.S. Stock-Index Futures Erase Gains as Asia’s Sell-off Seeps In
U.S. equity-index futures erased earlier gains after Chinese President Xi Jinping’s speech on Tuesday failed to lift investor sentiment.
March e-mini contracts on the S&P 500 were little changed as of 3:08 p.m. in Tokyo after rising as much as 0.5 percent earlier on Tuesday. The morning climb in stock-index futures came after a rout in the U.S. sent the S&P 500 Index to a more than one-year low. The MSCI Asia Pacific was down 1.1 percent.
Stock markets in Asia extended declines after Xi’s speech marking the 40th anniversary of China’s reform disappointed investors that had been expecting economic stimulus or further opening up, said Francis Lun, Chief Executive Officer at Geo Securities Ltd.
- The S&P 500 dropped to a 14-month low as Wall Street keeps watch on a partially inverted yield curve and weakening global economic data. The Federal Reserve is likely to hike rates on Wednesday, even as President Donald Trump intensifies his attacks on the central bank.
- Xi in his speech on Tuesday said China would stick to its policy agenda, despite pressure from the U.S. and others to allow more competition in its economic system. No new major policies were announced and Xi dedicated long passages of the speech to reiterating the need for the Communist Party to exercise leadership and control over all aspects of the country’s development.
- Tensions between the U.S. and China are still lingering as negotiations progress to end the trade spat between the world’s two largest economies. While China’s openness to cutting tariffs on U.S. cars and buying soybeans is feeding optimism that the dispute will be resolved, investors remain cautious a deal will be done by the March 1 deadline.
- Crude settled below $50 a barrel in New York on Monday, for the first time in more than a year. The U.S. Energy Department and data provider Genscape Inc. were among those predicting higher American supplies, as uncertainties persist over the effectiveness of curbs by the OPEC+ coalition.
- March contracts on S&P 500 Index little changed after swinging between gains and losses as of 3:08 p.m. in Tokyo; the underlying gauge is on track to post its biggest December slide since 1931.
- Dow Jones Industrial Average futures were little changed after rising as much as 0.5 percent. Nasdaq 100 Index futures up 0.2 percent, paring earlier rise of as much as 0.6 percent.
Risk remains cautious ahead of European trading
The softer tones in Asian equities are very much expected as they are mainly a follow through of the poor performance seen in US stocks overnight. However, the more notable points for me here are the drop in E-minis and oil.
E-minis have basically pared earlier gains on the day and are now trading at the lows, down by 0.1%. It goes to show that cautious tones remain and that investors may not be too confident of a rebound despite the S&P 500 index closing at its lowest level in 2018 – also lowest daily close since October last year.
On the year, the S&P 500 is down by 4.8% now and as Adam pointed out here, it’s time for investors to weigh between further selling and buying value. However, the issue with the decline here is a build up of many things that are affecting sentiment; with worries about global growth slowdown at the forefront of it.
And that isn’t something that gives confidence towards valuation and it will be something investors will be torn about as we close out the year. In short, the sentiment there is what will keep stocks on edge until we get more signs to come over the next few months.
As for oil, WTI crude fell settled below the $50 mark yesterday and that is a crucial level from a technical perspective. It opens up the door for sellers to hammer price down towards the August 2017 lows of around $45.50 before aiming towards the June 2017 low of $42.05.
And further deterioration in oil prices won’t bode well for equities and risk either as it will exacerbate declines in oil-related stocks and only heighten market worries.
All eyes now turn towards the Fed tomorrow. If Powell doesn’t deliver a dovish message, that could very well be the nail in the coffin for equities and risk.
Bitcoin Surges Above $3,500; Other Major Crypto Prices Also Jump
Bitcoin surged above the $3,500 mark on Tuesday in Asia, while other major cryptocurrency prices also jumped.
Bitcoin jumped 6.3% to $3,503.8 and Ethereum advanced 8.1% to $92.74 at 12:50 AM ET (05:50 GMT).
XRP surged 8.6% to $0.33084, while Litecoin gained 8.0% to $28.371.
Bitcoin jumped as much as 11% on Monday. The move was its best daily performance since the last week of November, according to industry data site CoinDesk.
“As a relatively new concept, cryptoassets are still finding their feet in terms of value,” said Mati Greenspan, senior market analyst at eToro. “It’s important to remember that all assets, in every market, experience a process of price discovery, and that cryptos are no different.
Despite today’s gains, the digital coin has still fallen around 80% from its record high in December 2017. In the last three months, it has fallen nearly 50%.
The crypto market has seen dramatic falls in recent weeks, with news of increased regulatory scrutiny and a hard fork in Bitcoin cash cited as major headwinds.
Among the 15 largest digital coins by circulating market cap, 11 of them have declined by more than 80% from their respective record highs, data from OnChainFX showed.
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