Investors Turn Cautious As US Fed Ponders “Wait and See” Approach

Risk appetite in global equity and forex markets remain high as last night’s headlines from US suggested that upcoming rate hike from US Fed this month could be the last in quite some time and weighed down US greenback in broad market significantly.

Summary: Global equity markets saw increase in investor’s risk appetite since trading session began for the day as Wall Street Journal reported last night that “Federal Reserve officials are considering whether to signal a new wait-and-see approach after a likely interest-rate increase at their meeting in December, which could slow down the pace of rate increases next year”. This news greatly weighed down US greenback which is already suffering high level of bearish pressure owing to recent inversion curve in US benchmark treasury yields. As US Dollar’s value went down sharply which meant decrease in exchange rate and the news highlighted possibility for long term outlook of US Greenback turning dovish, volatility increased in dollar denominated major global currencies and other risky assets across Asian and European markets.

• The US Dollar index (USD/DXY) which measures the strength of dollar against six major global currencies closed at $96.77 last night down by 0.30% weighed down by speculations that upcoming Dec rate hike by US Fed will be the last before it hits pause button on its tightening cycle.
• Equity markets in Asia and Europe are trading with significant gains after three days of bearish decline influenced by overnight headlines from Wall Street Journal. Australia’s S&P/ASX200 and Japan’s NIKKEI 225 closed positive for the day with 0.42% & 0.82% increase in value respectively.
• Investors have now taken a cautious stance and await US NFP, Unemployment and Wages data to gauge health of US economy as positive data could boost declining US T.Yield and result in Fed continuing with future rate hikes as planned instead of pressing the pause button.
• Crude Oil price continues bearish price action after overnight declines worth over 2% in both spot and futures market as OPEC summit yesterday ended without any supply/production cut announcement.

On The Lookout:

1. US T.Yields – The US benchmark bond yields continued its week long decline into Friday’s European market hours as news hit market overnight that US Federal Reserve is pondering over “wait and see” approach and Fed members have commented before that further rate hikes could be data dependent. US macro data in recent times have had mixed outcome and investors are following US economic data release carefully for clues of Fed’s forward guidance during upcoming FOMC update.
2. OPEC Summit – The meeting between members of OPEC and Russia yesterday closed without any announcement on supply and production cuts and the debate on supply cut between OPEC and non-OPEC members set to continue today as Russia resists big oil cut seeking only reduction of 100000 to 150000 barrels per day while OPEC members agreed to cut production by 1 million barrels per day. Meanwhile several OPEC members also want Iran which is currently under US Sanctions to also participate in production cut resulting in delay in announcement of production cuts.
3. Brexit – PM May wants to push forward with parliamentary vote for approval of latest Brexit deal as planned on December 11, 2018 despite several lawmakers and ministers urging her to delay as current situation is against approval of Brexit deal and threatens both her government and her position as UK’s Prime Minister.
4. Economic Data Release & Events – European market is scheduled to see the release of Euro zone Q3 GDP data while US markets will see release of Non Farm Payroll, Average Hourly Earnings (MoM & YoY), Unemployment Rate, Michigan Consumer Sentiment and Michigan Consumer Expectations data. Meanwhile Canadian market will see release of Employment Change and Unemployment Rate.

Trading Perspective:

1. AUD/USD – The Australian dollar was dumped yesterday in the reaction of fresh worries about the US-China relations and hit a 3.5 week low but disappointing release of the ADP report on the US private sector employment triggered a modest US Dollar retracement and helped the pair to recover slightly. The uptick, however, lacked any follow-through during the Asian session on Friday as investors now seem reluctant to place any aggressive bets ahead of today’s important release US NFP data.
2. EUR/USD – EUR/USD is trading in the mid-1.1300 ahead of the all-important US jobs report and amid upbeat comments by Fed Chair Powell as the common currency is weighed down by Political concerns such as infighting in Italy over budget crisis, French Protest on tax hikes and German CDU initiating process to choose next party head.
3. USD/JPY – The USD/JPY pair built on the overnight rebound from five-week lows but upside move was capped ahead of 113 handle. USD which was weakened owing to disappointing ADP data and renewed Sino-U.S. trade war woes got some relief from upbeat US ISM non-manufacturing PMI and a late recovery in the US equity markets. Bulls, however, seemed lacking strong conviction as investor’s remains cautious ahead of NFP, Unemployment and wages data scheduled to release during American market hours.