Today’s Key Market Drivers: 20th August 2019
Currency markets remain range-bound awaiting Fed Minutes and Jackson Hole conference.
Monday was a great example of no high impacting news and thus very little in the way of price movement across currency markets. The Yen remained on the back foot after Friday’s rally and with Monday starting the week off positive on global stock markets the negativity from last week has subsided for the time being.
Stocks continue to rebound.
US Treasury Yields rose for the second day in a row which gave traders a reason to be more optimistic and buy back into stocks. On Wednesday last week, it was all doom and gloom with economists and commentators predicting the US Fed was headed for a recession inside 12 months and the Fed would be forced to drop interest rates not once but twice before Xmas.
Two days is a long time in financial markets and Friday and Monday’s trading sessions have proven me correct so far that bond markets had it wrong when they sold off so severely last week. It was an emotional reaction that often occurs when a market has been rallying for so long which ends up resulting in traders jumping at shadows the moment the economy looks like it might be slowing.
I said in Sunday’s Pre-Market Prep video I expect an overall positive week on global stock markets and this should keep downward pressure on the Yen. I expect Jerome Powell’s opening address in Jackson Hole, Wyoming to be more hawkish than the market expects and I think the expectation of a Fed cut in September is overcooked and will fall after his speech.
Euro CPI misses estimates putting downward pressure on the currency.
The Euro remained under pressure on Monday missing CPI estimates and moving back lower to the bottom of the tight trading range that had developed late last week. I expect any rallies on the Euro to be short-lived and they will be used by professional traders as opportunities to get short once again before the ECB announces its next stimulus program.
RBA minutes set for release at 11.30am AEST.
The AUD v USD stayed within a 21-tick trading range on Monday with traders awaiting the next piece of economic data before making a decision to buy or sell the local currency.
The RBA monthly minutes are due at 11.30am AEST this morning and may offer some forward guidance as to what the Central Bank will do with interest rates in coming months. My expectation is we will see one more interest rate cut before Xmas bringing the official cash rate to 0.75%. We will be at 0% this time next year.
Canadian Dollar falls against the Greenback.
The US Dollar spiked higher against the Canadian Dollar on Monday which appeared to be a strange move considering Oil jumped by 2.4% after a Saudi Oil field was attacked by Yemen Houthi fighters. A spike in Oil prices can often benefit the Canadian Dollar but on this occasion, it appears something larger was at play. There was no high impacting economic data responsible and whilst it is rare that I can’t put my finger on a move and tell you why. Half a cent price movements do occur from time to time driven by companies buying and selling activity.
Investment banks are exchanging currency for corporate clients every day and it is not unreasonable to think a company bank transaction may have occurred where hundreds of millions of Canadian Dollars were sold for US Dollars right at a time where liquidity was thin in the Asian trading session and therefore the USD v CAD moved higher. This would then likely trigger algo computer systems that buy on the back of volume and it becomes a self-fulfilling move.
Is the Fed going to drop rates in September?
It depends on who you listen too. Last week I read commentary from leading economists quoting a Fed rate cut a 100% certainty and fully priced into the US Dollar. This morning I am reading traders are pricing in a 76% chance the Fed cuts rates next month.
So, who do you believe? We are still 3 ½ weeks away before the Fed has their two-day meeting and, in my view, you should keep your focus on the US economic data being released and what the Fed minutes have to say this Wednesday. Jerome Powell isn’t likely going to contradict the minutes when he speaks on Thursday and whilst it can be easy to get sidetracked by so-called expert commentators just keep your analysis simple and factual. You can always read what a Central Bank is going to do by the language it uses in its statements and press conferences. For example, based on the recent commentary from Central Banks I expect…
- The US Fed to hold off dropping rates in September and remain data-dependent. The Fed minutes Wednesday may change my view on this.
- The RBA and RBNZ will likely drop rates one more time before Xmas.
- The BOE will drop rates to 0% if the UK leaves the EU without a firm Brexit deal.
- The ECB will in coming months announce a stimulus program.
Unless the Fed gives traders a reason to believe rate cuts are coming, the US Dollar will remain a market favourite and ultimately this will drive Trump and US administration nuts! I am warning you now that a strong US Dollar will ultimately lead to an attempt by the US administration to lower the value of the greenback.
Trump predicts no recession.
The US President told reporters on Sunday he doesn’t see the USA having a recession any time soon. Trump said “I don’t think we’re having a recession. We’re doing tremendously well. Our consumers are rich. I gave a tremendous tax cut and they’re loaded up with money.”
Trading confidence is a process that starts with self-discipline.
About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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