News & analysis

The dollar has remained on the offensive today, as central bankers focus on managing increasing speculation in financial markets that major central banks such as the Fed and BoE may be forced into negative rates, and President Trump has made a series of comments suggesting a heightened risk of renewed tensions with China.

GBPUSD has reached fresh lows for the month, while CAD, AUD, and NZD have all reached fresh lows of varying time periods.

News and views:

  • The USD strength seen over the past day or so has a mild flavor of risk-off. CAD, AUD, and NZD are all weakening, while the euro’s losses have been small in percentage terms although significant in terms of threatening to reach fresh month lows.
  • A heightened rate of commentary from Donald Trump on China may be partly behind the worsened tone in risk appetite. Following comments on China earlier in the week, Trump speculated in an interview with Fox News “we could cut off the whole relationship. If we did, what would happen? You’d save 500 billion”. The US would almost certainly not save $500 billion dollars in any ordinary sense, if trade relations with China ended, and as always the POTUS is best taken seriously instead of literally, but the heightened rate of commentary on the issue may be taken as a sign of increased trade risk by markets.
  • Jerome Powell was clear during yesterday’s webinar that the FOMC was opposed to negative interest rates, although he did not rule them out. The key message was delivered in response to a question, instead of in the main text of the speech – a clever way of avoiding drawing any more attention to the issue, which is already dominating market attention. Powell said the FOMC was unanimous in its assessment, was not looking at negative rates, and that the evidence on their effectiveness was “mixed”. USD was gently bid on the news, although fixed income markets such as OIS, which have been pricing in a change of negative rates, were not moved after the speech. The fact that OIS and Federal Funds futures market pricing was unchanged by the speech suggests that participants in these markets believe negative rates are something the Fed will be forced into considering by future bad performance, as opposed to something merited by current data.
  • Andrew Bailey joined the chorus of central bankers denying that negative rates were a matter of active policy consideration today, also in a webinar. Bailey was as clear as Powell, saying “It is not something that we are currently planning for or contemplating”, while adding the obvious: that “it’s always wise…not to rule anything out forever”.
  • EURCHF is trading through some significant levels today, and is in danger of a close below the 1.05150 level that has supported it in recent sessions. Given the SNB’s open acknowledgement that it wants to avoid further appreciation, markets are testing the resolve of the central bank with the 1.05 number now looking exposed.

 

EURCHF falls to fresh lows

 

G10 in Red vs USD

 

Federal Funds Futures unconvinced by Powell Denial of Negative Rates

 

Author: Ranko Berich, Head of Market Analysis

 

 

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