Summary: The Dollar finished mixed against its Rivals, little-changed ahead of the Fed’s final meeting for the year. Most traders expect the US central bank to hike the Fed Funds rate by 0.25%. However, bets for an increase have lessened to 70% from 80% on Monday. Fears of slowing global growth due to trade uncertainty and recent mixed economic data pushed equities lower into the bear market territory. The S&P 500 turned negative in choppy trade to end near September 2017 lows following an initial rally over 1.0%. The Yen extended gains against the Greenback, finishing up 0.3% (112.51). EUR/USD ended with mild gains (1.1356). The Kiwi outperformed climbing 0.6% to 0.6850.
New Zealand’s 10-year bond yielded 2.43%, the nearest to the benchmark US 10-year yield, among the Majors. The 10-year US yield dropped another 4 basis points to 2.82%. Upbeat US Housing data enabled the Dollar Index (USD/DXY) to recover to 97.05, little-changed from 97.09 yesterday.
Oil prices plunged 6.0% overnight as investors fretted about global growth. Energy shares sank. Upbeat US Housing data enabled the Dollar to climb off it’s lows.
- USD/JPY – The Yen extended its gains versus the Dollar lifted by lower US yields as well as poor risk appetite. USD/JPY dropped to an overnight low of 112.249 before rallying at the close to end at 112.51. The Bank of Japan’s monetary policy decision is due on Thursday, followed by a press conference by Governor Haruhiko Kuroda. Expect subdued trade in Asia today into both these central bank meetings.
- NZD/USD – The Kiwi outperformed its peers, rising to finish 0.60% higher to 0.6858 from 0.6808 yesterday. Westpac’s Consumer Confidence Index climbed 5.6 points 109.1 in December. The rise was a marked change from a sharp drop in Q3. The narrowing between NZ and US 10-year yields boosted the Kiwi.
- US Ten-Year Bond Yield – The benchmark Ten-year yield fell 4 basis points to 2.82%, near August’s lows. The support at 2.80% should hold into the Fed meeting but beware a break lower. The Two-year yield fell to 2.65% (2.70% yesterday) which is the lowest since early September. The US Dollar needs yield support to hold current levels, let along rally further.
On the Lookout: US President Trump piled on more pressure on the Fed with another tweet saying he wouldn’t agree with another rate hike. Trump also cited the Wall Street Journal’s suggestion that the Fed should pause. While any criticism or comments on Fed policy is unnecessary (particularly ahead of the meeting) Asian traders will be on the look-out for further.
The current disagreement over President Trump and Congress over his budget requirements for a border wall threaten a partial government shutdown.
Data today will also be looked at. New Zealand reports its Current Account. Out of Europe, Germany releases its PPI for November. The UK reports on its Annual Headline and Core CPI and House Price Index. Canadian Headline and Trimmed Mean CPI followed by the US Current Account are the last set of data before the FOMC rate decision and Statement (early tomorrow morning).
Trading Perspective: A dovish Fed rate increase of 0.25% will weigh on the Dollar. This will mean that the Fed will slow down the pace of its rate rises for 2019. Given the current market volatility and slump in equity prices, the Fed may opt for a 0.15% increase in the Fed Funds rate. The current disagreement over President Trump and Congress over his budget requirements for a border wall threaten a partial government shutdown. This is not Dollar positive. Market positioning remains long of Dollar bets and the risk is for further corrective moves.
- USD/JPY – The Yen should continue to strengthen in the current environment. The outcome of the BOJ meeting following the Fed is keeping the USD/JPY from trading lower. Immediate support lies at last night’s low of 112.25. The next support can be found at 111.70-80. Immediate resistance lies at 112.85 (overnight highs) followed by 113.20. The yield on Japan’s 10-year JGB yielded 0.01%, down one basis point in contrast to the 4-basis point drop of its US counterpart. Market positioning remains long US Dollar bets against the Yen. The preference is lower for this currency pair.
- EUR/USD – The Single Currency closed little-changed at 1.1355 from 1.1351 yesterday. The Euro hit a high of 1.14024 before edging lower at the New York close. Euro area growth has slowed while political uncertainty over the governments of Italy and France remain. On the other side is the weakening US Dollar as the Fed slows its pace of rate hikes. German 10-year Bund yields closed one basis point lower. The range between 1.1250 and 1.1450 has not broken although risks are growing for a topside break. Market positioning is short Euro bets which add to downside pressure. Immediate resistance lies at 1.1400 and then 1.1450. Immediate support comes in at 1.1310 and then 1.1270.
- AUD/USD – Another currency that finished little-changed against the US Dollar, at 0.7172 (0.7177 yesterday). The Aussie had a narrow trading range of 0.7165 and 0.7203. We can expect similar today in Asia. The lower commodities and risk-off sentiment are constraining the Aussie. Immediate resistance lies at 0.7200 and 0.7230 for today. Support can be found at 0.7160 (overnight low 0.7165) and then 0.7130. A weaker overall US Dollar should see the Aussie trade higher.
- US S&P 500 – It closed at 2540 after rallying to 2574. In early Asia, the S&P 500 continues to trade heavy with its current level at 2528. There is a short term support at 2520 and then 2500. Strong support should emerge at 2470. Immediate resistance can be found at 2570 and then 2630. While we should see some consolidation in Asia today, the risk remains south.
Happy trading all.