Market sentiment remained subdued yesterday, with major global stock indices being a see of red. Apart from the less-dovish-than-expected FOMC decision, the increasing likelihood over a partial US government shutdown tonight may have also weighed on investors’ morale. Among the G10 currencies, SEK was the big winner after the Riksbank increase rates for the first time since 2011. The pound remained unfazed after the BoE’s own rate decision.
The dollar traded lower against all but one of the other G10 currencies on Thursday, with the main winners being SEK, JPY and CHF in that order. The only currency that failed to gain against the greenback was CAD, with USD/CAD found virtually unchanged this morning.
The greenback came under strong selling interest yesterday, with no apparent reason. However, the broader risk appetite remained subdued, with major global indices being a sea of red. The negative sentiment rolled over into the Asian day Friday, with Japan’s Nikkei 225 and China’s Shanghai Composite closing their sessions 1.11% and 0.79% down respectively.
As we noted yesterday, the not-so-dovish Fed decision triggered a “flight to safety” market reaction. Although the Committee revised down the number of hikes it expects throughout 2019 from 3 to 2, this was still well above market consensus, which is still not pricing in even a single quarter-point increase. As we noted in the past, higher interest rates mean higher borrowing costs for companies, something that could erode their profitability and that’s why investors abandon stocks and instead seek shelter to safer assets, like the yen.
On top of concerns over the Fed’s future policy plans, developments in the US political scene may have also weighed on investors’ morale. The House of Representatives voted in favor of funding President Trump’s border wall yesterday, but this is expected to be rejected by Senate tonight, just hours before a deadline, after which the government will partially shut down. Trump insisted that he will only sign a bill including wall funding, but senators have made it clear that they will not divert from their position. If they fail to find common ground up until tonight, nine government departments will close.
Huge yen-buying activity was seen yesterday during the US trading session. As the equity markets are deeply in the red, investors are trying to find safe-havens to put their money in. This is where the yen has been coming in over the past few days. From the technical side, USD/JPY has been on a slide lower since Monday. Even the medium-term upside support line taken from the low of the 29th of May was not able to withhold the bears, as they rushed through that line with confidence. Yesterday’s strong sell-off led to a drop below the 111.00 level and the pair found support near the 110.81 hurdle, from which it pushed back up. Even though we may see a bit of further correction, still, the near-term outlook remains bearish.
If USD/JPY struggles to overcome the 111.35 barrier, this could mean that the pair is not able to correct more than that. Such a move may invite the bears again, so that they could drive USD/JPY back down. If that happens, the pair could easily move to re-test yesterday’s low at 110.81. Slightly below lies another potential area of support near the 110.35 level, marked by the low of the 7th of September.
On the upside, if USD/JPY gets back above the 111.70 barrier, this might clear the path towards the next potential area of resistance at 111.95, a break of which could lead the pair higher to the 112.25 level. This level acted as a strong support zone between the beginning of November and the middle of this week, when it finally got broken. Now it could take the role of being a strong resistance.
Yesterday’s big winner was SEK, which surged following the Riksbank’s decision to raise rates to -0.25% from -0.50%, the first increase since 2011. Although in previous statements the Bank has clearly noted that interest rates will be raised either in December or February, the softness in latest inflation and GDP data may have prompted some, including us, to abandon hopes that Swedish policymakers could push the hiking button at this gathering.
Thus, the move may have came as a surprise and that’s why SEK surged, although it could be characterized as a “dovish hike” given the downgrade in the Bank’s inflation and interest rate projections. According to the statement, the next rate rise will probably occur during the second half of 2019, while after this, the forecast indicates approximately two rate rises per year.
As for our view, although SEK could continue gaining for a while more, we remain skeptical over its longer-term performance. We prefer to continue monitoring the core CPIF inflation metric, which excludes energy, in order to assess the likelihood and the timing of the next rate increase by the world’s oldest central bank. In the end of 2019, the core CPIF is projected to be +1.9% yoy, but the last time we saw the rate at such a high level was back in September 2017. Now, it stands at +1.4% yoy. Therefore, signs of weakness or a failure of this metric to pick up could worry policymakers, who may eventually decide to push back the timing of when they could act next.
Passing the ball to the pound, this currency traded slightly higher against its US counterpart, but this has nothing to do with the BoE decision. Actually, the event passed largely unnoticed. The Bank decided to keep interest rates unchanged at +0.75% via a 9-0 vote, repeating that an ongoing tightening would be appropriate at a gradual pace and to a limited extend.
Officials also maintained the view that whatever form Brexit takes, the Bank’s response could be in either direction, meaning that they could hit the hiking button even after a disorderly divorce from the EU. However, although this point proved positive for the pound at the November meeting, it may have been balanced out by the assessment that since the previous meeting, the near-term outlook for global growth has softened and downside risks to growth have increased, as well as by the view that inflation is likely to fall below 2% in coming months due to the slide in oil prices. Policymakers also noted that Brexit uncertainties have intensified considerably since the Committee’s last meeting.
In our view, the muted reaction of the pound shows that GBP-traders keep their gaze fixed on the political landscape, and only that. Whatever forecasts and signals the BoE provides, everything could change after the 29th of March. With May struggling to get any concessions from Brussels, investors remain concerned that in the delayed vote, scheduled for the week starting on the 14th of January, the Parliament will reject the existing Brexit accord. Adding to that, yesterday, the government removed from its guidance to companies the description of a no-deal case as “unlikely”, and instead referred to just a “no deal scenario”. So, having all that in mind, we stick to our guns that uncertainty is likely keep the pound under pressure, and any rallies limited and short-lived.
Yesterday, after the Swedish central bank’s rate hike, the krona strengthened against a basket of currencies. The US dollar was no exception, as the Bank’s announcement pushed USD/SEK strongly to the downside. The pair managed to reach a low, near the 8.925 area, from which it retraced back up slightly, in order to end the day above the lower side of the range that USD/SEK had been trading in since the beginning of November. Even though yesterday’s slide in the pair could be seen as a bearish indication for the near-term outlook, the fact that USD/SEK got back above the lower bound of the previously-mentioned range puts us in a more cautious position, hence why we will take a cautiously-bearish stand for now.
Another drop below the lower side of the range, which is at around 8.963, may invite more bears to the table and the rate could slide towards yesterday’s lows at 8.925. If that area is not able to withstand the bear-pressure, its break may lead to a further drop of USD/SEK to its next potential support zone, at the 8.883 hurdle, marked near the low of the 16th of October.
Alternatively, if USD/SEK fails to go ahead with breaking the lower bound of the range, but instead, makes a push higher and breaks above 9.005, this may be an opportunity for the bulls to step in and recapture some of yesterday’s lost grounds. We could then target the 9.036 obstacle, a break of which could lead towards the 9.082 level, which was the intraday swing low of the 19th of December and the intraday swing high of the 18th of the same month.
In the UK, we have the final GDP for Q3, which is expected to confirm its preliminary estate and show that the UK economy accelerated to +0.6% qoq from +0.4% in Q2. That said, we don’t expect this release to attract any attention. After all, we already have models and data suggesting how the economy may have performed after that quarter. The NIESR GDP tracker suggests that economic growth is set to slow to +0.4% qoq in the last quarter of 2018, while the monthly GDP for October revealed a +0.1% mom growth after the flat readings in August and September.
We also get final GDP data for Q3 from the US, as well as personal income and spending for November, which are always accompanied by the core PCE index, the Fed’s favorite inflation metric. The US final GDP is expected to confirm the second estimate of 3.5% qoq SAAR, while both income and spending are expected to have slowed down. As for the core PCE rate, it is expected to have ticked up to +1.9% yoy from +1.8% yoy, which is likely to prompt market participants upwardly adjust their expectations with regards to future interest rates by the Fed.
From Canada, we get the monthly GDP and retail sales, both for October. GDP is expected to have rebounded to +0.2% mom from -0.1% mom, while retail sales are expected to have accelerated somewhat in both headline and core terms.
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