Asia Morning: The Fed Refuses To Connect The Dots

The Federal Reserve FOMC cut the Fed Funds rate 25 basis points overnight to 1.75-2.00% as expected, but wandered off the market’s script though as the committee members “dot plots” on rate expectations, indicated no need for further cuts before the end of 2020.

The hawkish cut certainly took markets by surprise with the greenback rising and oil and gold falling. Stock markets recovered early losses, led by Fed-Ex, to finish mostly flat for the session. The decision wasn’t unanimous yet again, with three members of the 17 person committee dissenting, one calling for a 50 bps but and two voting for no cut at all.

With the statement almost unchanged, Fed Chairman Jerome Powell ignored the vitriol from President Trump’s social media account, to hold the line that the domestic economy was doing very well thank you very much, but that external factors were clouding the growth picture. He indicated the Fed could respond to these if necessary.

The most apparent result to me, apart from an upset POTUS, is that the Federal Reserve, having at least partially normalised interest rates post the GFC, is unwilling to surrender that advantage with so many moving parts in play internationally. It will concentrate on domestic data and keep its rate-cutting powder dry for as long as possible, to respond better to a rainy day. It means dollar bears will face a longer wait for their day in the sun.

The Federal Reserve isn’t the only central bank on the podium today. Brazil cut rates by 0.50% this morning as their economy continues to drag along the bottom of the pond. Today we also have the Bank of Japan, Bank Indonesia along with the Bank of England, the Norges Bank and the Swiss National Bank.

The Federal Reserve holding fast takes the pressure of the Bank of Japan, which will likely remain unchanged. The more hours we go without an announcement past 1100 SGT, the higher the likelihood of a surprise in my experience. Bank Indonesia will probably snip 0.25% off their lending rate as the Rupiah holds firm but inflation and growth track lower. We expect no change from Norway and Switzerland despite the ECB restarting QE. The Bank of England will hold until after the 31st October Brexit deadline. Depending on the outcome, it could either cut or hike, making monetary policy their as cloudy as Brexit itself.

Equities

Wall Street fell earlier in the session after FedEx sharply revised its growth outlook down. The street recovered post-FOMC with most pundits assuming the Fed will cut again this year, and Microsoft announced a massive share buyback. The S&P 500 finished flat, the Nasdaq fell 0.10%, and the Dow Jones rose 0.15%.

The overnight fall in oil prices has lifted Asian stock markets today. The Federal Reserve holding fast on its rates outlook means Asia’s economies will not be forced into a round of rate cuts themselves, to maintain their pseudo dollar pegs. The Nikkei 225 is 1.15% higher, the Kospi 0.80% higher, and the ASX 200 0.75% higher. Shanghai and other regional markets are likely to follow suit as Saudi Arabia oil production returns to normal faster.

Currencies

The U.S. dollar flexed its muscles against the G-10 overnight as the Fed announced their hawkish rate cut. Yield differential is proving decisive; the USD/JPY rose 0.30% to 108.35, EUR/USD fell 0.35% to 1.1030, GBP/USD fell 0.25% to 1.2470 and AUD and NZD both fell 0.50% to 0.6830 and 0.6320 respectively. The dollar index rose 0.25% to 98.51.

The dollar has risen modestly against regional currencies this morning tracking the broader G-10 move. We expect that trend to continue throughout the day.

The AUD has tumbled again this morning following employment data just released in Australia showing an unexpected fall in full-time jobs of 15,500. The AUD has fallen 0.50% to 0.6790 with the next technical support at 0.6750. It continues a poor run of data for the lucky country and will heighten expectations of further easing by the RBA sooner, rather than later.

Oil

Despite Saudi Arabia displaying weapons wreckage they said was Iranian, it was the news that production in Saudi Arabia would be restored very quickly that weighed on markets. An unexpected rise in official U.S. crude inventories was a sucker punch oil didn’t also need, with Brent crude falling 0.60% to $63.65 a barrel and WTI falling 0.75% to $58.75 a barrel.

Early Asia has seen both contracts rise modestly on profit-taking buying, but the market seems to be rapidly losing discounting the weekend’s attacks in Saudi Arabia as production comes back online. The apparent lack of appetite for military retaliation against Iran appears to have drawn oil markets into a state of complacency, which in my opinion is erroneous. The Iranian proxies, the Houthi rebels of Yemen, have stated that more targets can and will be attacked. The lack of response from the international community will likely embolden further mischief from Iran. The price action we saw on Monday in oil could quickly reoccur, and traders ignore that risk at their peril.

Gold

With a hawkish cut from the FOMC lifting the dollar and somewhat counterintuitively, equities, and a perceived de-escalation in oil tensions, gold was always in for a tough day at the office. Gold fell 18 dollars to $1483.00 an ounce at one stage before recovering to close 0.50% lower at $1494.00.

Gold has eased lower to $1489.50 in early Asian trading as equity markets rally across Asia on lower oil prices overnight, with the FOMC decision now parked on the sidelines. A stronger dollar will keep the pressure up on gold with crucial technical support nearby at $1480.00 an ounce. Although this area was tested and held overnight, the ensuing bounce was unimpressive, and a break of the support level will probably see more stop-losses hitting the market. That said, any escalation in Saudi Arabia/Iran tensions will likely see fast money rushing straight back into gold and lifting the yellow metal back into its broader $1480.00/$1530.00 trading range.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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