21st August 2019 - Tight ranges ahead of tonight's Federal Reserve inputs

Good morning


• The USD declined overnight, in line with the drop in Treasury yields, as investors braced for a potentially dovish Federal Reserve at a Jackson Hole, Wyoming, gathering later this week, with many expecting an announcement of some measure that would ease U.S. recession concerns. The dollar index was down 0.2% at 98.166 after earlier rising to a 2-1/2-week high of 98.40. It reached its 2019 high of 98.932 at the beginning of the month.

• The 3 day rally in US stocks was brought to an end overnight with the S&P 500 falling 1% after doubts were casts over other Chinese companies that may provide national security risks to the US.

• U.S. Treasury yields fell as the prospect of more central bank easing boosted demand for government debt, while concerns about Italy’s government and Britain’s tumultuous exit from the European Union fuelled safe-haven buying. Investors are focused on meetings by the Federal Reserve and the European Central bank next month, when the central banks are expected to cut rates as both regions face slowing growth. Benchmark 10-year notes gained in price to yield 1.56%, down from 1.59% late on Monday. The two-year, 10-year yield curve flattened to 4 basis points, from 6 basis points.

• Concerns about the collapse of Italy’s government and Britain exiting the EU without any deal also created some safe-haven demand. Italy's prime minister announced his resignation as he made a blistering attack on his own interior minister, accusing him of sinking the ruling coalition and endangering the economy for personal and political gain. The European Union rebuffed Prime Minister Boris Johnson's demand that it reopen the Brexit divorce deal, saying Britain had failed to propose any realistic alternative to an agreed insurance policy for the Irish border.

• Trump spoke during what was a quiet afternoon as once again put the pressure on the Fed to cut rates with a minimum reduction of 100 bp over time. He said that he was looking at possible tax cuts and that the US is far from a recession. On trade he said that he is not yet ready to make a deal with china and that the EU would meet any demand if faced with tariffs on auto exports.


• Oil prices steadied on optimism U.S.-China trade tensions will ease and hopes major economies will take stimulus measures to ward off a possible economic slowdown, after falling earlier on concerns over future demand. Brent crude settled 29 cents, or 0.5%, higher at $60.03 a barrel, while U.S. crude rose 13 cents to $56.34 a barrel.

• Gold rose to firm above $1,500, recovering from a more than 1% slide in the previous session, as U.S. yields fell on increasing expectations for looser monetary policy to address fears of a global downturn. Spot gold was up 0.7% at $1,505.68 per ounce, after falling to a near one-week low of $1,492.10 on Monday.


• The dollar fell 0.4% against the JPY to 106.17 and was down 0.4% vs. CHF at 0.9777.

• EUR rose 0.2% to 1.1102 after Italy's prime minister, Giuseppe Conte, announced his resignation on Tuesday even as he made a blistering attack on his own interior minister, Matteo Salvini. Conte accused Salvini of sinking the ruling coalition and endangering the economy for personal and political gain.

• GBP was down 0.3% at 1.2170 and slipped 0.1% versus the EUR to 91.20 GBP.

• USD/CAD made a high of 1.3346 in early NY trade as oil fell to daily lows.


• Australia - July Westpac MI Leading Index

• NZ – Global Trade auction

• UK – July Public Sector Net Borrowing

• US – July Existing Home Sales

• US – FOMC Minutes (discussion of risks will be the focus)

• Canada - July CPI (Annual core inflation expected to remain close to 2%)

AUD thoughts :

Yesterday’s RBA minutes discussed unconventional monetary policies, including negative interest rates, at its August board meeting as it left the door ajar for further easing having already cut rates twice to 1%. Minutes of the Reserve Bank of Australia's (RBA) Aug.6 meeting showed it would consider further cuts to interest rates if it was needed to support growth and achieve its 2% to 3% inflation target. The RBA was tight-lipped about the timing of the next move, saying only that it would consider a further easing "if the accumulation of additional evidence suggested this was needed" to support its growth and inflation targets.

The overnight AUD low at 0.6751 came on US yields rise, then reversed. The Federal reserve remains priced to cut by 25bp at the Sep, Oct and Jan meetings.

A quiet day ahead with investor attention likely to remain on any headlines from China and the US regarding ongoing trade negotiations. With the US National Security concerns now firmly back on the agenda we may see further developments in the coming sessions.

The U.S. central bank will release minutes from its July meeting tonight, while Fed Chairman Jerome Powell is due to speak on Friday, when he is expected to give guidance on whether

a rate cut is likely in September. The major event is definitely Powell on Friday and we will see how he talks about the markets and what the expectations are for the September meeting.

USD-AUD 2-yr yield spreads by Aug highs - AUD likely stuck in a 0.6736 – 0.6800 range until Jackson Hole symposium on Friday. AUD remains in a tight range awaiting the Fed inputs tonight.

Demand remains around the 0.6750 region while further interest likely sits ahead of 0.6700 - Topside resistance is expected at 0.6820 which has provided a cap in recent trade.

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