Dr. Yellen’s speech delivered to the New York Club was titled, “The Outlook, Uncertainty and Monetary Policy”, and unlike last week’s ensemble of Hawkish Fed officials, she was decidedly more dovish and arguably more dovish than even at her post-FOMC press conference in March.
Needless to say, Dr Yellen’s speech was the major driver in Foreign Exchange Markets, and we’ve seen a broad selloff on the USD on the back of this aggressively dovish forward guidance as traders aggressively scaled back their USD rate hike projections for 2016.
Two factors stand out in her speech and not unexpectedly, the economic slowdown in China and falling oil prices present the biggest obstacle to returning to interest rate normalization.
Let’s face it; the Foreign Exchange landscape is incredibly challenging at the moment as traders views swing across the ever-shifting Federal Reserve Board forward interest rate guidance. Last week, for example, the USD rebounded significantly after an ensemble of hawkish Fed officials assisted the Buck recover from a very Dovish FOMC statement released in Mid-March. The noncommittal Fed illustrates how analytically difficult the current economic conditions are to decipher as US economic signals run counter to those signals from the global economy.
While the financial picture is looking up in the US, and the recent economic data supports a sooner than later US interest rate hike, global data is worrisome, especially that out of China. Throw in sagging oil prices to the equation along with vulnerabilities in both emerging markets ASEAN economies, makes is necessary for the Feds to consider global economic conditions within the context of domestic US Monetary policy.
I’m not overly surprised the Fed is erring on the side of caution. However, the fear is that investors start to believe the Fed toolbox is empty, especially if they need to deal with any additional domestic or global economic shock.
Oil and Manufacturing
WTI oil prices fell overnight, but this may have been due to the usual sell off that ensues pre-API Inventories Data. However, the inventory data printed a build of 2.6 Million Barrels which is right on top of the department of energy consensus for tomorrow’s report. In early trade, we’ve seen a bounce off overnight lows.
Looking forward, we still have several high risks events that will play a huge role in local trader sentiment.
The closely watched Chinese PMI’s are slated for release this week. On the Manufacturing PMI, the reading will likely point to further contraction highlighting softness in the sector due to China’s economic slowdown. Last month, the Index collapsed to 49 and analysts are looking for another low number with current estimates around the 49.3. The Caixin manufacturing index has not seen any expansion since early 2015, and it is unlikely we see a turnaround in March. Current estimates are coming in at 48.3. Soft PMI prints will likely keep ASEAN currencies on the defensive this week. A PMI miss on the downside should weigh negatively on the AUD as a drop in the manufacturing index will have negative consequences for commodity prices.
USD/JPY traded on the back of broader USD sentiment and initially slipped below the 113 level. However, losses have been extended in early APAC trade down to the 112.40 support level. The Nikkei is trading lower, and both are likely feeding off one another.
Positioning has been blown out overnight as a wave of USD selling on this dovish detour by the Feds. The USD has traded heavily across versus the Asia-Basket
The Ringgit opening at 3.96 level down from 4.00 yesterday this despite the overnight slide in oil prices. I suspect the market will be a bit apprehensive to chase this move lower given oil prices and some talk that the BNM may look to replenish reserves on this latest USD capitulation
The dovish Fed triggered a round of stop loss on USD/CNH as traders re-priced the Fed interest rate curve. I would expect to see further USD weakness in days to come after the Fed all but left the door open to a weaker USD.
USD/SGD collapsed overnight as the USD tumbled and stumbled across the board. As with the other local currencies, the bearish USD signal from the Fed is likely to see further USD capitulation this week.
NZD/USD was the best-performing G10 currency overnight with the Aussie a close second as the USD selling centered on the high-yield commodity block currencies. Traders flocked into the Kiwi and bought the Aussie playing off higher yields down under, as investor conviction is running high that Global Central Bankers, including the Feds, will keep interest rates lower for longer. In a nutshell, the currencies are benefiting from investors yield appetite.
The Kiwi is trading just shy of major resistance at .6875 while the Aussie is consolidating in and around .7640, still well below the post-March FOMC USD capitulation.
The Aussie has been a bit hesitant this morning on this recent USD sell-off, despite the Fed all but opening the door to a continued dollar slide; there’re a few things sticking out that might present short-term resistance. Yellen’s concern about China’s economic recovery should send ripples through the RBA and given the fact Governor Glen Stevens is likely less than happy with the Aussie above .7600; it brings into question a possible RBA rate cut.
Iron ore prices have capitulated for the 5th consecutive day, which should weigh negatively on Aussie sentiment
Not to be overlooked, the ASX took a bit of a hammering yesterday after traders put Australia’s Big Four Banks in the cross hairs after a warning issued by ANZ that bad debts will rise more than expected. While the dovish Fed is supportive, at the open financials will likely remain under pressure.