Fed Signals Flexibility on Rate Cut Path, US Yields, Dollar Advance

Summary: The Dollar advanced against its rivals, climbing most against the safe-haven Yen and Swiss Franc. US bond yields rose after Fed minutes signalled that policymakers preferred flexibility when it came to the path of further rate cuts. In its July meeting FOMC members discussed a 50-basis point rate cut but decided on 25 basis points, seen as a mid-cycle adjustment. Yields on US treasuries rose after the minutes were published. The benchmark 10-year yield bond yield climbed to 1.59% (1.56%). Two-year US rates rose to 1.57% from 1.51%. Risk appetite increased, stocks rallied, paring gains at the New York close. The Dollar gained 0.37% against the Yen to 106.64 from 106.22. USD/CHF was up 0.47% to 0.9830 from 0.9778. The Euro slipped back to 1.1082 (1.1100) while Sterling retreated 0.345% to 1.2122. The Australian Dollar was little changed, finishing at 0.6780 (0.6778).
The DOW finished up 1.4% at 26,260, while the S&P 500 ended up 1.25% to 2,932.
Canada’s July Headline CPI beat forecasts, up 0.5% against an expected 0.1%.

CNBC US Bond Yield Table - 22 AUG 2019
CNBC US Bond Yield Table – 22 AUG 2019
  • EUR/USD – The Euro slipped against the generally stronger US Dollar to close at 1.1085. The shared currency traded within a familiar 30-point range between 1.1080 and 1.1110.
  • USD/JPY – the Dollar advanced against the safe-haven Yen to 106.65, up 0.32%. The rise in the US 10-year yield once again the main support for the Greenback. The increase in risk appetite also weighed on the Yen and the other safe-haven Swiss Franc.
  • GBP/USD – The British currency slipped back to 1.2125 from 1.2170. Traders were cautious about an upcoming meeting between Boris Johnson and Angela Merkel on Brexit. While both leaders intend to make the divorce as smooth as possible, market sentiment on Sterling remains bearish. On the other hand, market positioning is well short on Pounds.
  • AUD/USD – The Australian Dollar finished little changed at 0.6780 against the backdrop of broad-based USD strength. Trade tensions between the US and China have eased with the recent US concessions. And the RBA has signalled a wait-and-see stance for now.

On the Lookout: The Jackson Hole, Wyoming Symposium begins late Thursday in the US. Fed Chair Jerome Powell’s speech takes on added significance following the signal from the Fed’s later meeting minutes and constant criticism from President Trump.
Today sees a data dump with the latest Manufacturing and Services PMI’s from several major economies.
Australia’s Flash Manufacturing PMI beat forecasts (51.3 vs 51.0) however Services underwhelmed (49.2 vs 51.8). Japan reports its Flash Manufacturing PMI (10.30 am Sydney). Japanese All Industry Activity Index is also released today. The Euro area begins with French, German and Eurozone Flash Manufacturing and Services PMI’s with most expected to be close to the previous month’s results. Eurozone Consumer Confidence (August) is also due for release later in the day. The ECB releases its monetary policy meeting accounts. UK CBI Realised Sales precede Canada’s Wholesale Sales report (June). The US releases its Flash Manufacturing and Services PMI followed by US Conference Board Leading Industry Index.

Trading Perspective: The Dollar should stick within its recently established ranges ahead of Jackson Hole. The climb in US bond yields will provide short term support for the Greenback. Bonds though have been behaving more like currencies. The Dollar has since retreated in early Asia following its advance on the less dovish Fed. Jackson Hole this year could be huge for FX. The next 48 hours will be crucial for the US Dollar and its rivals.
Jackson Hole also coincides with the conclusion of the northern hemisphere August summer holidays. This writer can remember Jackson Hole meetings in the past where a speech from the Fed Head (Yellen, Bernanke) moved FX in extremely volatile fashion. The importance of Jerome Powell’s speech cannot be underestimated.

  1. EUR/USD – The Euro trading range has narrowed as we approach Jackson Hole. Despite the resignation of Italian PM Conte yesterday EUR/USD traded in a tight 27-point range between 1.1080 and 1.1107. Today’s Euro area PMI’s will be the first test for the shared currency. Median expectations are for slightly weaker numbers than the previous release. Euro area economic data has been mostly weaker in Q2. Meantime market positioning is still short Euro but not at extremes. EUR/USD has immediate resistance at 1.1110 and 1.1130. Immediate support can be found at 1.1080 and 1.1060. Weaker than expected PMI’s could see 1.1060 tested but expect that to hold into Jackson Hole. Look to trade both sides for today with a likely range at 1.1060-1.1110.
CNBC US Bond Yield Table - 22 AUG 2019
CNBC US Bond Yield Table – 22 AUG 2019
  1. USD/JPY – The Dollar traded to an overnight low at 106.213 before rallying on the Fed minutes to 106.65 at the New York close. The rise in US 10-year yields to 159% and increase in risk appetite boosted the Dollar against the Yen. Overnight high was 106.65 which is immediate resistance for today. The next resistance level is found at 106.80 and 107.00. Support can be found at 106.20 followed by 105.80. Look to trade both sides with a likely range today of 106.25-106.75. Prefer to buy dips.
  2. AUD/USD – The Aussie Battler held against the overall stronger Dollar finishing little changed at 0.6780 (0.6778). AUD/USD has immediate resistance at 0.6800 followed by 0.6830. Immediate support can be found at 0.6770 (overnight low 0.67729) followed by 0.6750. Emerging Market currencies were stronger against the US Dollar last night which is Aussie supportive. Speculators are also short Aussie bets. And the Australian Dollar TWI (Trade Weighted Index) is still near multi-year lows. Look to trade a likely 0.6760-0.6810 range. Prefer to buy dips.

Happy trading all.