Fed Shifts Language, drops “Patient”, Opens Door to Rate Cuts

Summary: The Dollar weakened, and bond prices surged after the US Federal Reserve opened the door to rate cuts, dropping its description stance as “patient”. Instead, the Fed said it “will act as appropriate to sustain” the US economy’s expansion. The Fed’s Dot Plot (projections) saw 7 of 17 policymakers favouring 2 rate cuts in 2019. St Louis Fed President James Bullard wanted a 0.25% rate easing today. US Treasury prices soared while yields plunged with the 2-year yield down 12 basis points to 1.74%, 18-month lows. The benchmark US 10-year bond yield fell 4 basis points to 2.02%, September 2018 lows.  The Dollar Index (USD/DXY) dropped 0.40% to 97.258 (97.636). The Euro gained 0.25% to 1.1227 (1.1197). USD/JPY, more sensitive to moves in US yields, fell 0.46% to 108.10. The Bank of Japan is expected to keep its policy unchanged at its meeting today. Sterling soared 0.45% to 1.2645 on short covering ahead of today’s Bank of England policy meeting. The Dollar’s fall was not broad-based. Both the Australian Dollar (0.6885) and New Zealand Dollar (0.6540) trimmed gains to finish flat in New York. This morning’s upbeat New Zealand Q1 GDP beat forecasts rising to an annual 2.5% (vs 2.4%). The Kiwi jumped to 0.6562 from 0.6538.

CNBC US 2-Year Bond Yield Chart - 20 June 2019
CNBC US 2-Year Bond Yield Chart – 20 June 2019
  • EUR/USDFollowing ECB President Mario Draghi’s dovish tilt yesterday, the Euro pared its gains, easing off overnight highs to close at 1.1227. President Trump singled out the Euro in a tweet and warned Europe not to hold down the exchange rate. Currency wars are increasingly becoming the next phase of the global conflict.
  • USD/JPY – the Dollar weakened 0.45% against the Yen to 108.10 (108.45 yesterday) as US bond yields plummeted. The Bank of Japan is widely expected to keep its monetary policy unchanged in its meeting in Tokyo this afternoon (Asian time).
  • AUD/USDMore bearish forecasts for interest rates continued to weigh on the Aussie Battler which closed little-changed at 0.6885 (0.6875 yesterday) against the Greenback. A large global fund manager (Blackrock Inc) has shorted the currency on a bet that the RBA will cut rates to as low as 0.5%. to rescue the struggling economy. The Aussie rallied to 0.6895, boosted by its southern cousin, the Kiwi following upbeat New Zealand Q1 GDP.

On the Lookout: The action continues with the Bank of Japan policy meeting in Tokyo this afternoon. The Bank of England holds its monetary policy meeting in London tonight (9 pm Sydney time). Both central banks are widely expected to leave their monetary policies unchanged. The Bank of Japan will wait for the US Fed to act. The BOJ could be forced to act if the Fed and ECB trim rates and the Yen strengthens. The Bank of England is different from all the other central banks in that it cannot be described as dovish from recent comments by BOE officials. The possibility of a no-deal Brexit is a worry to everyone, yet some policymakers see rates rising faster than markets expect. Sterling climbed 0.54% as best performing major last night.
In an early data release, New Zealand’s Q1 GDP matched a q/q forecast rise of 0.6% lifting the annual rate to 2.5% against an expected 2.4%. In Australia the RBA releases its economic bulletin. RBA Governor Philip Lowe speaks in Adelaide on labour markets to the Committee of Economic Development of Australia. The BOJ is expected to keep its Policy Rate unchanged at -0.1% at its meeting (early Tokyo afternoon). BOJ Governor Haruhiko Kuroda holds his press conference a few hours later. The Eurozone sees the release of the ECB’s Economic Bulletin. UK Retail Sales for May follows. The Bank of England reports on its Monetary Policy Summary, Official Bank Rate (0.75%, no change) and MPC Official votes. The US follows with the Philly Fed Manufacturing Index, Current Account, Weekly Unemployment Claims and Conference Board’s Leading Index (May).

Trading Perspective: The US Federal Reserve has shifted to a dovish stance and rate cuts are coming. The Dot Plot spells it out clearly. Without yield support, the Dollar cannot rise. With market positioning still long of US Dollar bets against most Major currencies, the US currency is headed lower. It is no secret Donald Trump wants a lower Dollar. Indeed, the currencies are the next tool in the global conflict. Let the currency wars begin!

  1. EUR/USD – The Euro held the 1.1180 level well despite Draghi’s dovish comments. In singling out the Euro’s weakness, President Trump has tied policymaker’s hands. EUR/USD traded to an overnight high of 1.12542 before trimming gains to 1.1227 in New York. EUR/USD has immediate support at 1.1210 followed by 1.1180. Immediate resistance can be found at 1.1250 and 1.1280. Look to buy dips with a likely range today of 1.1220-70.
  2. USD/JPY – The Dollar tested immediate support at 108.00, trading to an overnight and 2-week low at 107.899 before settling at 108.10. The benchmark US 10-year yield slumped 4 basis points to 2.02%. Japanese 10-year JGB yields were one basis point lower to -0.14%. Immediate support can be found at 108.00 and 107.80. A sustained break through 107.80 could see USD/JPY drop to as low as 107.10. Immediate resistance lies at 108.30 and 108.60. With the BOJ meeting today, and Japanese buying interest around the lows, we can expect a likely range of 107.85-108.45. Prefer to sell rallies.
DAILY FX AUD USD Chart - 20 June 2019
DAILY FX AUD USD Chart – 20 June 2019
  1. AUD/USD – The Aussie Battler rose to an overnight high of 0.6909 before easing to settle at 0.6885. Traders will focus on RBA Governor Lowe’s speech in Adelaide on labour markets to confirm the central bank’s dovish bias. The world and his mother are bearish on the Aussie and market positioning is increasingly backing this fact. The Aussie Dollar may have a bearish bias but let’s not forget that it is quoted against the US Dollar, which is now headed lower. The more shorts there are in the Battler, the stronger the pullback will be. Immediate resistance lies at 0.6910 followed by 0.6940. Immediate support can be found at 0.6870 and 0.6850 (overnight low 0.6855). Look to buy dips with a likely range today of 0.6875-0.6925.

Happy trading all.