What started off as being a pretty quiet day was once again turned upside down, the USD went on a rollicking rampage which left the stock markets and emerging market assets reeling in its wake. Clearly, this was the biggest selloff since Brexit, as US markets tumbled by 2.5%. Most of the whipsaw action came from the “talking Feds” yesterday and I cannot recall members ever being able to move the market with such velocity.
Despite the market moving on comments from Rosengren and Tarullo, it was a comment made on Thursday night that captured my imagination and awakened the conspiracy theorist in me. His comments for me suggested that the Fed may be ready to hike, but then he reiterated that the Fed would NOT hike in September IF the Fed funds probabilities were below 40% and the S&P 500 was below 2150. At the time, those comments meant nothing to me, but as I watched the S&P 500 move from 2176 to 2122 yesterday, I then noticed the Fed funds probability rate moving above 30% from 18% (Goldman Sachs have this closer to 55%). This market is so confused that virtually anything could happen come 21 September.
Back to yesterday though, first we heard from Fed Rosengren, who was very much in favour of gradual tightening – Hawkish. This set the ball in motion for the USD bid to start gathering momentum. There was a slight pause in this momentum as Fed Tarullo preferred to see evidence that inflation will rise – Dovish.
How did this effect the major currency pairs?
The AUDUSD and NZDUSD were effected most in the carnage, a concoction of “risk off”, weaker commodies and breaking through major technical levels were all to blame and this led to both pairs falling by over 1%. Despite oil prices coming under severe pressure, the USDCAD was able to fair a little better than its fellow commodity currencies – no doubt better than expected employment data aided in this – nevertheless the CAD faced massive pressure yesterday.
The EURUSD and GBPUSD came under massive pressure and both closed around critical technical levels. The EUR traded between the 100 day MA and 200 hour MA, and waiting for some direction on Monday. The GBP was able to find support for most of the evening at around 1.3256 which does offer some hope – remember that the BOE does meet on Thursday.
With the equity markets down over 2% last night, I think that the USDJPY performed really admirably, as traders could have been forgiven for selling the pair. Considering that the major moves may have materialized when most Asian Pacific Traders were enjoying a hard earned beverage, I do feel that this “contagion” could spread on Sunday morning with possible gaps in Asian equity bourses and the JPY having a dip lower.
Some noteworthy data on the calendar for next week:
- US Retail Sales – Thursday 14:30
- UK Monetary Policy – Thursday 13:00
- Australian Employment – Thursday 03:30
- US CPI – Friday 14:30
More important than this in my opinion however, is that FOMC Governor Brainard will speak on Monday. This will be the last day that Fed members can talk, but Brainard speeches usually move the market. Brainard is an eternal dove and any form of hawkish comments from her could send the USD marching on again!
That’s next week’s problem though.
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