Forex today: a volatile session with plenty to digest, DXY up +0.3%
Forex today was choppy in the lead into the FOMC statement and interest rate decision and then still choppy afterwards but with tighter ranges.
The DXY (+0.3%) was higher on the back of the prelude for the nonfarm payrolls data in that the ADP was a big beat vs expectations. US private sector payrolls rose 235k in Oct, much higher than the 200k expected, although we will not get the full picture until revisions come through next month due to them being distorted by the hurricanes. The data was so strong that Goldman raised their call on NFP to 340k from 312k expected by the market. Other data may have been a miss in terms of the expected result, with ISM manufacturing activity falling to 58.7 from 60.8 previous, (a 13-year high) and vs the 59.5 expected, but it was still a solid number and the background data was also very positive.
"Meanwhile employment only dipped modestly (to 59.8 from 60.3). Together with a good ADP employment report showing 235,000 jobs added, it bodes well for Friday’s payrolls figure which we expect to exceed 300,000. Indeed, the ISM report suggests 83% of manufacturers are seeing employment growth right now," explained analysts at ING Bank earlier.
Prior to the FOMC, the Atlanta Fed tracker for Q4 updated to at 4.5%, up from 2.9 percent on October 30th, again, supporting the bid in the greenback. The FOMC was pretty much a non-event, especially for those who might have been expecting some change to the Fed's guidance or for a hint of a Dec hike. However, it begs the question, "Why wait until December, if the economy indeed requires an interest rate hike?" Between now and December, the markets, and the Fed, will indeed be monitoring the data events closely. In terms of inflation, there was, as expected, no change in their view that inflation will return to the Fed's 2% target "over the medium term". If monetary policy will indeed be “gradually” tightened and if the economic risks are "roughly balanced", in the Fed's opinion, then between now and December is perhaps just that extra bit of time the Fed needs to satisfy themselves that December is the right time to hike again? consequently, markets did not overreact to this balanced statement and press release and instead turn their attention to who will become the next Fed chair.
On the note of the next Fed chair, while NY traders were walking out of the door, the WSJ released news that Powell had been chosen by Trump. However, there have not been any official announcements as yet and Powell declined to comment on reports on his doorstep. So, perhaps it is not quite a done deal and hence no reaction in the dollar? Trump is expected to announce the decision on Thursday before he leaves for a trip to Asia on Friday.
For rates, the US 10yr treasury yields fell from 2.39% to 2.35% before of the FOMC and partly retraced to 2.38% afterwards. The Fed fund futures yields firmed slightly post-FOMC, pricing the chance of a December rate hike at 98%.
In terms of the currencies, EUR was volatile within a narrow range of 40 pips between 1.1650 and 1.1610. Rate differentials were the theme once again, weighing in the greenback's favour. Sterling was hounded by faders ahead of the BoE announcements tomorrow where a sell the fact theme seems to be mounting as the bank is expected to hike rates by 25bps, a potential one and done scenario that could lead to a lower pound. A hawkish hike could expose and hurt the shorts though. EUR/GBP was making a minor recovery on the back of cable, up from 0.8732 lows, (the lowest since mid-June), to a high of 0.8783. USD/JPY was a grind to the upside from 113.80 to 114.20, while equities follow the DAX lead fro overnight and weighed on both the safe-haven yen and Swiss franc as the day’s underperformers. As for the antipodeans, the Aussie drifted higher from 0.7650 to 0.7696, consolidating for the fourth day below 200-DMA. The outperformer, the Kiwi, extended its jobs data gains to 0.6931 but closed lower at around 0.6890. Gold was stable near the 200-DMA.
Key events ahead in Asia
Analysts at Westpac noted the day's key events for Asia: "Australia: Sep dwelling approvals are expected to fall 1.0%. Westpac forecasts a 3.0% decline as the high-rise wind down continues and support from the non high-rise segment fades. Sep trade balance is anticipated to be a surplus of $1.2bn, up from $1.0bn in Aug. Westpac sees a $1.4bn surplus with increased iron ore and coal shipments offsetting a temporary dip in LNG volumes, while imports are flat."
Key notes from the US session
- Trump to tap Fed’s Jerome Powell for Fed Chairman - WSJ
- Atlanta Fed: GDPNow model forecast for real GDP growth in Q4 at 4.5%
- Wages return to trend growth as payrolls rebound - Nomura
- CME Group FedWatch's Dec hike probability inched higher to 97.7% post-FOMC
- US Construction Spending: Longer-run trends show only a slight hint of improvement - Wells Fargo
- The Fed: support for a December rate hike, who will be next Chair? - ING
- FOMC statements: Comparison between September and November
- US: Private sector employment increased by 235,000 jobs from Sep to Oct - ADP
- Markit: Strong improvement in operating conditions across the US manufacturing sector
- US: October PMI registered 58.7, a decrease of 2.1 points from September reading - ISM
- Wall Street ends mixed as FOMC remains on track for a December hike