Kathy Lien, Managing Director Of FX Strategy For BK Asset Management
Daily FX Market Roundup Sept 26, 2019
The biggest story in the world right now is the whistle blower’s complaint on President Trump but the biggest story in the forex market is the persistent decline in the euro. Most of the major currencies traded higher against the greenback today with the euro being one of the few exceptions. The decline began shortly after the US equity market open and accelerated into the London close. Comments from ECB Chief Economist Lane added to the pain – he said this month’s massive stimulus package “wasn’t that big,” adding “they won’t reach QE limits for a longer period of time and the ECB has scope for further rate cuts if needed.” The euro is falling despite this week’s better-than-expected German IFO report and today’s increase in Germany’s GfK consumer confidence index. Bund yields are also falling at a slower pace than Treasury yields, which is normally positive for the EUR/USD. Yet the pair is down 4 out of the last 5 trading days because investors are worried that between the US and UK’s troubles, Eurozone policy makers will need to step in with more action and the longer the Germans wait to announce fiscal stimulus, the more likely EUR/USD will hit 1.08.
The persistent decline in Treasury yields, downward revision to US GDP personal consumption and the sell-off in stocks should be negative for the dollar and yet the greenback is rising because the market still thinks President Trump will be safe from impeachment and they don’t see political uncertainty having a significantly negative impact on the economy. Whether that’s true or not remains to be seen but the latest communication confirms our view that the White House will distract impeachment with trade. Yesterday, President Trump said a deal with China could be closer than expected. Today White House Economic Advisor Kudlow said China moves have been positive and the US will not impose auto tariffs as long as goodwill progresses. We believe the deeper the impeachment inquiry, the more market-friendly comments we’ll hear from Trump. Personal income, spending, durable goods orders and revisions to the University of Michigan Consumer sentiment index are scheduled for release tomorrow. These reports should not have a significant impact on the dollar.
The best-performing currency today was the New Zealand dollar. NZD/USD popped last night on the back of comments from RBNZ Governor Orr. While the central bank made it clear that more easing is possible, Orr believes “unconventional policy is unlikely” because the “cumulative impact of easing is working its way through the economy.” Considering how oversold NZD/USD was, traders were looking for a reason to take profits. However it's important to realize that the RBNZ is still dovish and open to further easing so in order for the recovery to be durable, we need to see data take a turn for the better. The Australian dollar on the other hand ended the day well off its highs as the US dollar gained momentum. There’s been very little action in USD/CAD. The pair has been confined in a 1-cent range for nearly 2 weeks as a stronger economy offsets lower oil prices.
Sterling also ended the day unchanged against the greenback. As noted by my colleague Boris Schlossberg:
In the UK PM Johnson appeared unrepentant after suffering defeat in the Supreme Court and continued to barrel towards a no-deal Brexit. The unapologetic stance has soured market sentiment and cable was inching towards breaking key support at the 1.2300 level. The market continues to believe that some sort of Brexit deal will get done – or at very least another extension will be granted, but unless Mr. Johnson is compelled to ask for an extension UK may well crash out of EU with no deal. For now, the risks of such a scenario still look small but today’s trading action in the pound shows that part of the market is becoming increasingly alarmed.