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  • Forex today was in consolidation, in tandem with markets in general, following Powell’s speech yesterday.
  • European markets rose after all FTSE 100 banks passed the Bank of England’s Brexit scenario stress test – Shares left mixed results but mostly higher – (Raid at Deutsche Bank AG tied to a money-laundering probe limited the gains). The German DAX edged up 0.1% to 11,312.10.
  • The minutes of the November 7-8 meeting of the FOMC echoed the increased emphasis on data dependency that we have heard from various participants recently.
  • The dollar was steady with the market digesting potential dovish turn from the Fed. The US treasury yields and major indices round-tripped.  

Forex was in consolidation following Powell’s speech yesterday which indicated the Fed is approaching the vicinity of neutral. There was some delayed action post the FOMC minutes that took the major stock indices, yields and currencies on a round trip as the last piece of information for the markets ahead of December’s meeting, trying to position and price expectations of fed fund hikes which have now come down for 2019.  The US yield curve flattened with 2-year down 0.6bps and 10-year down 2.9bps. The US 10yr treasury yield round-tripped from 3.03% to 3.00% and back, as did 2yr yields from 2.81% to 2.77% and back. The Fed fund futures price the chance of the next rate hike on 19 December at 80%.

 The more immediate focus, however, is the G20 and Trump-Xi meeting on Saturday. Although, we need to get through Asia’s crowded calendar first, which includes China Nov PMIs.

 FOMC minutes,(Rabobank’s key pointers):

  • “The minutes of the November 7-8 meeting of the FOMC echoed the increased emphasis on data dependency that we have heard from various participants recently.
  • The minutes confirmed that the FOMC intends to hike at the next meeting, on December 18-19.
  • The minutes signalled that another IOER tweak is coming in December. In fact, market developments may force the Board of Governors to act before the FOMC meeting on December 18-19.
  • Our baseline scenario is another hike in March 2019, followed by an inversion of the curve in Q2. The latter would lead to a pause in the Fed’s hiking cycle.”

Currency action

EUR/USD ranged sideways between 1.1350 and 1.1400, preserving the previous day’s rise. Meanwhile.  European government bonds rallied across the board, especially Italy, the 10 year -5bp while Eurodollar futures extended their break above 200 DMA as the likelihood of a Fed pause is cemented in Powell’s speech and the FOMC minutes. However, dollar weakness was offset by the German CPI miss – (2.3% vs 2.4% and 2.55 prior). EUR/USD looks to be bottoming, but we need to see an improvement in market sentiment (Euro trades as a proxy to risk sentiment). ECB’s Villeroy said economic crisis risks have become very dangerous while ECB’s Hernandez said that the Eurozone economy slowing more than expected. Bulls were also tempered on wider DE-US spreads, (ECB rate hike doubts trump Powell’s dovishness), and the possible auto tariffs imposed by the Trump administration. However, the technical picture remains bullish with RSIs that are biased to the upside and taking note of that doji candle that has formed on that monthly chart – bullish.  As for sterling, using Carney’s term the currency remains on a Cliff Edge on the 127 handle. UK consumer confidence dipped to an 11-month low and the lingering Brexit uncertainty trumps Powell’s dovish speech. The Brexit headlines kept coming in the early European session. Firstly, EU chief Brexit negotiator Michel Barnier’s comments were saying that negotiations on Brexit are over and that this is the only possible deal. Then, UK PM Theresa May’s statement followed saying that any extension to the Article 50 will reopen the negotiations and that if she fails to get the Brexit deal past parliament, some preparations for leaving the EU without an agreement would be needed to be undertaken. Carney’s sentiment was back on top of sterling and forced cable down to S1 at 1.2753. Cable crawled out of the North American session licking its wounds -0.38% at 1.2771 having travelled between Thursday’s range of 1.2850-1.2756. This was leaving the cross higher by the close of play. EUR/GBP ended North America at 0.8902, +0.46% with bulls pawing their new foundations on the 0.89 handle and ready to charge down the double top resistance area near 0.8940. A debate between PM May and Labour leader Corbyn has been set for 9 December. The TV channel and format are yet to be agreed – Should be a roller coaster ride for the cross. USD/JPY round-tripped from 113.45 to 113.20 and back, pulling back on general dollar weakness. Traders are stepping aside at this stage of the game, into month end, but more keenly alert of the pending risks associated with the proposed dinner between Xi and Trump this Saturday at the G20 summit. Markets are in high anticipation of sound bites of discussions over the Sino/US discord over trade which is going to be a coin toss as far as USD/JPY is concerned. The dollar has previously picked up a bid on such uncertainties, but Powell has thrown a spanner in the works there, which may give the yen the edge, depending on the outcome. As for commodities, they were mostly higher by the close of play in North America on mounting optimism for a US trade breakthrough with China. However, the Aussie was less optimistic. AUD/USD probed higher for a while, reaching 0.7344 when USD and yields sank following the FOMC minutes,  and then eased back to 0.7320 and the Asian low late in the day, ending flat in NY. While based above the 23.6% fibo of 2018 decline, RSI is diverging and a gravestone doji has formed – A warning to bulls. Copper’s recovery has slowed down, forming a closing daily doji while gold for February delivery added 60 cents, or 0.05%, to settle at $1,230.40/oz.

Key notes from US session:

  • Wall Street ends choppy session slightly lower as investors wait for G20 summit

Key events ahead for Asia:

In China, we have the official business sentiment surveys. The manufacturing PMI drifted lower to 50.2 in Oct while non-manufacturing has held up at 53.9.