Wednesday, 18 September 2019

Dollar perched at seven-week highs vs yen before Fed decision

LONDON (Reuters) - The dollar held near a seven-week high against the Japanese yen on Wednesday before the outcome of a Federal Reserve meeting where officials are widely expected to cut interest rates by a quarter of a percentage point.

“The focus will be on the policy outlook and the Fed’s dot plots, and with market positioning broadly neutral, it should be a quiet session for the dollar,” said Thu Lan Nguyen, a currency strategist at Commerzbank in Frankfurt.

Against the yen, the dollar edged up 0.1% to 108.23 yen, just below a seven-week high of 108.37 yen tested overnight. The dollar index against a basket of other currencies rose to 98.28.

The dollar has been driven more by trade tensions between Washington and Beijing this year than by U.S. monetary policy. The dollar has gained nearly 1% against the yen since the last rate cut in July.

Morgan Stanley strategists believe that any dollar upside is likely to be capped, because market expectations are not overly dovish and a trade deal between the United States and China seems likely.

A retreat in global oil prices also restored some calm to markets. Oil prices fell in Asia, extending Tuesday’s 6% decline, after Saudi Arabia’s energy minister said the kingdom had tapped stockpiles to restore oil supplies to where they stood before weekend attacks shut around 5% of global output.

The euro was steady at $1.10620, more than 1% above the $1.0927 it reached last week, the lowest in more than two years.

After the Fed releases its policy decision, attention will turn to the Bank of Japan’s meeting ending on Thursday to see if it follows its global peers by easing policy.

Deepening negative rates will be an option if the BOJ eases, although the central bank may accompany that with measures to mitigate the pain on financial institutions, sources have told Reuters.

Reporting by Saikat Chatterjee

Cut and run: How U.S. stocks react in Fed easing cycles

NEW YORK (Reuters) - Not all U.S. rate-cutting cycles are created equal, at least when it comes to how the stock market reacts.

The Federal Reserve is expected to lower interest rates when it issues its policy statement on Wednesday at the close of a two-day meeting. It would be the central bank’s second reduction this year, on the heels of a 25 basis point cut at the July policy meeting, the first rate cut since 2008.

As recently as last week, markets were pricing in a greater than 90% probability that the Fed will shave another quarter point from its overnight lending rate, which is currently set in a range of 2.00% to 2.25%.

Based on past performance of the stock market following a rate cut, at issue for the market’s performance could be how dire the economy is now and how successful the Fed will appear to have been in staving off a downturn.

Of the past eight easing cycles since 1981, four have been identified as “insurance” cycles, when problems loomed but the economy was not in a recession, while four occurred when the economy was entering, or already in, recession, according to research from Allianz Global Investors.

After a year, the benchmark S&P 500 .SPX rose an average of 20.4% during insurance cycles, while the index fell an average of 10.2% during pre-recession cycles, according to Allianz.

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Another distinction in easing cycles: Smaller-cap stocks tend to outperform large caps, according to Jefferies research. Small-cap stocks have climbed 28% overall in the 12 months following the first rate cut, compared to 15% for large caps, the firm said.

Smaller companies are perceived to be more leveraged to the state of the U.S. economy and have higher debt loads or weaker balance sheets, according to Jefferies equity strategist Steven DeSanctis, and lower rates are expected to improve both situations.

Following a second rate cut in a cycle, which Wednesday's would be, the Dow Jones Industrial Average .DJI has gained an average of 20.3% one year later, according to Ned Davis Research.

“Perhaps because the second cut demonstrates the Fed’s commitment, or perhaps because the liquidity from the first cut had begun to work through the system, the gains have been immediate, with an average jump of 9.7% three months after the second cut,” Ed Clissold, chief U.S. strategist at Ned Davis Research, said in a recent report.

That the Fed seems to be poised for a 25 basis point cut, as opposed to a larger cut of 50 basis points, could spell better news for stocks.

Over the past 40 years, when the first two cuts in an easing cycle have been only 25 basis points, the S&P 500 has always been higher six and 12 months later, according to Ryan Detrick, senior market analyst at LPL Financial. Returns are more mixed when one of the cuts has been 50 basis points.

“History would suggest bulls should be rooting for a 25 basis point cut this week, as these are more viewed as ‘insurance cuts’ versus a 50 basis point cut, which could mean the Fed sees real trouble down the road,” Detrick said.

Reporting by Lewis Krauskopf

Tuesday, 17 September 2019

Dollar buoyed as markets digest oil shock; Aussie sold

TOKYO/SINGAPORE (Reuters) - The greenback found broad support on Tuesday amid the geo-political, and economic uncertainties cast by the attacks on Saudi oil facilities, while the Australian dollar was sharply sold after a dovish readout from the central bank.

Oil prices pulled back from soaring heights touched on Monday, and the yen and Swiss franc gave up gains driven by knee-jerk safe-haven buying.

The dollar rose to its strongest since Aug. 1 against the yen, touching 108.36 yen, helped also by U.S. President Donald Trump announcing he’d struck trade agreements with Tokyo.

Moves were slight, however, as traders await outcome of the U.S. Federal Reserve policy meeting on Wednesday, with strong expectations for a cut in interest rates, and Bank of Japan meeting on Thursday that could result in more stimulus.

“The market is in limbo between the oil price shock and the Fed meeting,” said Matt Simpson, senior market analyst at Gain Capital in Singapore.

“Like any price shock, people go: ‘What the hell has happened? What do we make of didn’t really spill over to currency markets like we might have expected.”

The dollar index held on to Monday’s gains to stand at 98.609. The euro stood a touch stronger at $1.1010, while the Swiss franc weakened slightly to $0.9919.

The Chinese yuan wavered, shedding 0.3%, as a lack of news ahead of meetings scheduled on Thursday between junior U.S. and Chinese trade officials began to sap markets’ optimism about chances of a breakthrough in negotiations to end a protracted tariff war.

The biggest major mover among major currencies was the Australian dollar, which dropped 0.4% to an 11-day low, dragging the New Zealand dollar with it, after the Reserve Bank of Australia flagged an easing bias in meeting minutes.

“They no longer talk about an accumulation of evidence in order to ease again, and highlight risks to the global economy,” said National Australia Bank Senior FX Strategist Rodrigo Catril. “It certainly sounds a lot more dovish than before.”

Another factor boosting the greenback on Tuesday was some exiting of bearish dollar bets in advance of the U.S. Federal Reserve’s two-day policy meeting.

Traders widely expect the Fed will cut interest rates by a quarter of a percentage point on Wednesday.

But their certainty around the timing has faltered in recent days, with the probability that the Fed will stand pat rising from about a fifth to 33% this week, while expectations for two more rounds of cuts by Christmas remain intact.

“Markets are pricing in two additional rate cuts by next year but the Fed is unlikely to make such a forecast, so we could see further gain in the dollar,” said Yukio Ishizuki, senior strategist at Daiwa Securities.

Oil-producing currencies clung to Monday’s gains in the wake of attacks that have cut Saudi Arabia’s production in half.

Yemen’s anti-government Houthi movement, an ally of Iran, claimed responsibility for the attack.

U.S. President Donald Trump said on Monday said it looked like Iran was behind the strikes but stressed he did not want to go to war. Iran has rejected the U.S. charges.

The Norwegian crown gained almost 1% Monday to trade at 9.8565 per euro while the Russian rouble hit a near seven-week high against the euro.

Each held those gains in Asian trade while oil importer currencies weakened, with the South Korean won retreating further from a two-month high touched on Monday, dropping 0.4%, while the Taiwan dollar shed 0.2%.

Reporting by Hideyuki Sano

Divided Fed set to cut interest rates this week, but then what?

SAN FRANCISCO (Reuters) - Deep disagreements within the Federal Reserve over the economic outlook and how the U.S. central bank should respond will not stop policymakers from cutting interest rates at a two-day meeting that begins on Tuesday.

While an oil price spike after attacks on Saudi Arabian oil facilities over the weekend added to the list of risks facing an economy already slowed by ongoing trade tensions and global weakness, the deep divide evident around the Fed’s policymaking table means further rate cuts could be far from a done deal.

At one end of the Fed’s massive boardroom sit St. Louis Fed President James Bullard and Minneapolis Fed President Neel Kashkari, who are expected to argue for a steep reduction in borrowing costs to counter low inflation and an inverted Treasury yield curve.

Pushback from the opposite end is likely to come from Cleveland Fed President Loretta Mester, who opposed the Fed’s rate cut in July, and Philadelphia Fed President Patrick Harker, who only reluctantly supported it and says he wants to leave rates where they are “to see how things play out.”

Fed Chair Jerome Powell, seated midway down the table, faces the delicate task of taking on board those views and the disparate arguments of the other dozen policymakers to build consensus.

A top challenge: making sense of economic data that suggests the U.S. manufacturing industry may be contracting and inflation remains weak, even as households continue to spend and employers overall are adding plenty of jobs.

“The discord is extremely visible,” said Gregory Daco, chief U.S. economist at Oxford Economics. “If you look at the economy today, you look at an economy that’s bifurcated ... The key question is whether that weakness seeps through the economy, and whether that’s aggravated.”

Since the Fed’s 8-2 decision to cut rates in July, a move that Powell called a ‘mid-cycle’ adjustment, the economic data has delivered mixed signals.

Strong retail sales and continued wage growth may add to Boston Fed President Eric Rosengren’s confidence that current economic conditions do not justify further policy easing. He dissented in the July policy decision.

The ongoing U.S.-China trade war makes Dallas Fed President Robert Kaplan among others concerned about slowing factory output and a slide in business investment. Kaplan supported July’s rate cut.

The newest wild card to factor in to the debate emerged unexpectedly in Saturday’s attacks on the Saudi oil facilities, which triggered the biggest spike in oil prices in more than two decades.

Fed officials could see the development either as a risk to an already fragile growth outlook, which would support the case for more easing, or as a welcome boost to inflation, which would back a case for standing still for now.

Traders of futures contracts tied to the Fed’s policy rate were pricing in, as of Monday afternoon, a 65.8% chance that the central bank would cut its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.75% to 2% on Wednesday.

And even though the conviction for further rate hikes has softened since last week, traders overall continue to expect one more reduction in borrowing costs by the end of the year.

“If everyone was on the same page at the Fed I could understand it,” said Lee Ferridge, head of macro strategy for North America at State Street Global Markets.

“But clearly there is disagreement at the Fed ... If the Fed is very split and Powell can’t give a strong signal, doesn’t that imply very few moves are likely, rather than these dramatic cuts?”

Fed policymakers will bring to the meeting their own views of where rates should be by December. In June, the last time they published their forecasts, about half of policymakers expected a total of two rate cuts this year; about half thought no rates would be appropriate.

That divide in the so-called Fed “dot plot” has borne little relation to how policy has actually shaped up, but it could add to confusion over the rate outlook after the conclusion of this week’s meeting.

With more dovish policymakers like Bullard, Kashkari and Chicago Fed President Charles Evans calling for more easing, and more hawkish policymakers like Mester, Harker and Kansas City Fed President Esther George more skeptical, “expect the 2019 dots to reflect this mixed opinion,” said Jefferies economist Ward McCarthy.

Reporting by Ann Saphir

Monday, 16 September 2019

Oil soars, weak China data hits shares

SYDNEY (Reuters) - Oil surged to four-month highs on Monday after weekend attacks on crude facilities in Saudi Arabia sparked supply fears, while shares in Asia extended losses as bleak economic data from China sapped investors’ appetite for riskier assets.

European and U.S. stocks market looked set to follow, with Eurostoxx 50 futures slipping 0.7%, while futures for Germany’s DAX were down 0.9% and those for France’s CAC 40 eased 0.5%.

By contrast, London’s FTSE futures climbed 0.3%.

Wall Street was signalling a weak start, too, with E-Mini futures for the S&P 500 off 0.4%.

Brent crude futures surged nearly 20% at one point early in the day and U.S. futures jumped almost 16%, both hitting their highest level since May. But prices came off their peaks after U.S. President Donald Trump authorised the use of the country’s emergency stockpile to ensure stable supply.

By 0640 GMT, Brent futures were up 10% at $66.31 per barrel, while U.S. light crude was up 9% at $59.82.

Trump also said the United States was “locked and loaded” for a potential response to the strikes on the Saudi facilities, which shut 5% of world production, after a senior official in his administration said Iran was to blame.

That inflamed fears about Middle East tensions and worsening relations between Iran and the United States, powering safe-haven assets, with gold up 1% to $1,503.4 per ounce.

“The bigger issue is what premium markets will build in to reflect the risk of further attacks,” said Kerry Craig, Global Market Strategist, J.P. Morgan Asset Management.

“In the very near-term, we may also see a pick-up in safe-havens,” he added.

“Central banks are likely to look through the inflationary impact of higher oil prices but the added geopolitical risk to an already fragile backdrop will not go without notice.”

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.4% after data showed China’s industrial production growth unexpectedly fell to its weakest pace in 17-1/2 years in August.

Painting a dour picture of the world’s second-biggest economy, China’s statistics bureau said the country faces increasing downward pressure from external uncertainties.

China’s blue-chip index eased 0.5%, while Hong Kong’s Hang Seng index faltered about 1%, despite expectations Beijing will soon announce more support measures.

Liquidity was relatively thin with Japanese markets shut for a public holiday.

In currency markets, the Saudi news pushed the yen up 0.2% to 107.83 per dollar while boosting oil-exporter currencies such as the Canadian dollar, which rose 0.4%.

“If risk appetite collapses due to fears of worsening Middle East tensions in the wake of any retaliation to the...attacks, some emerging markets could face a double whammy of pressures,” said Mitul Kotecha, Singapore-based senior emerging markets strategist at TD Securities.

He noted that the Indian rupee, Indonesian rupiah and Philippine peso were the Asian currencies most sensitive to oil shocks, given their economies’ dependence on crude imports.

The euro was little moved near a three-week top while the pound stepped back from Friday’s two-month highs to be last at $1.247. That left the greenback down 0.1% at 98.126 against a basket of six major currencies.

The Australian dollar, a major risk proxy, fell 0.3% against the yen, snapping nine straight days of gains. The kiwi dollar slipped to a one-week low on the yen.

“One immediate question this (attack) poses for bond markets is whether a further rise in the inflation expectations component of bond yields - which have proved historically sensitive to oil prices - will give this month’s sharp bond market sell-off fresh impetus,” said NAB analyst Ray Attrill.

“Or will safe-haven considerations dominate to drive yields lower?”

Futures for U.S. 10-year Treasury notes rose 0.3%.

In the cash market, prices for both two- and ten-year Treasuries gained, ending a five-day bond sell-off and sending yields lower from near 1-1/2 month highs.

Investors are also awaiting the outcome of the U.S. Federal Reserve’s policy meeting on Wednesday, at which it is widely expected to ease interest rates and signal its future policy path.

“The markets will look to the Fed as a key pillar of support and that will increasingly be in focus for global markets as the week goes on,” JPMorgan’s Craig added.

Reference: Swati Pandey

Dollar falls, oil-exporter currencies rise after Saudi attacks; yen firms

SINGAPORE (Reuters) - The dollar fell while safe havens and currencies of oil-producing countries rallied on Monday, following an attack on Saudi Arabian refining facilities that disrupted global oil supply and heightened Middle East tensions.

Oil prices surged nearly a fifth at one point following the strikes on two plants, including the world’s biggest petroleum processing facility in Abqaiq, which knocked out more than 5% of global oil supply.

Yemen’s Iran-aligned Houthi group claimed responsibility for the damage, but the U.S. has pointed the finger directly at Iran.

The Canadian dollar rose 0.4% to 1.3233 per dollar. The Norwegian krone rose 0.5% to 8.9363 per dollar. Both currencies often move together with the oil price because the countries are major oil exporters.

In India, a major importer of crude, the rupee fell almost 0.7%.

“The natural flow through of higher (oil) prices has seen the NOK and the CAD outperform, and we’ll probable see a better feel towards the (Russian) rouble later on,” said Chris Weston, head of research at brokerage Pepperstone Group in Melbourne.

The attacks reversed last week’s ebullient risk appetite and prompted U.S. President Donald Trump to tweet that the United States was “locked and loaded” for a response.

“We’ve got a beady eye on this and we’re prepared to pile back in to the Japanese yen after last week’s repositioning,” Weston said, adding that while trade was calm, the strikes presented another geopolitical “what if” to vex markets.

The safe-haven Japanese yen and Swiss franc both firmed. The yen rose 0.3% to 107.79 per dollar and the franc rose 0.4% to $0.9883. Gold jumped by 1%.

Against a basket of currencies the dollar edged lower to 98.162.

Beyond oil, currency markets are awaiting the outcome of central bank meetings in the U.S. and Japan this week and economic data in Australia and New Zealand that could determine the rates outlook in the Antipodes.

“Geopolitical risks and central bank rhetoric remain key drivers of risk this week,” Australia and New Zealand Banking Group analysts said in a note.

On the Brexit front, British Prime Minister Boris Johnson’s confidence of sealing a deal to leave the European Union by Oct. 31 applied renewed pressure to the pound.

Sterling fell 0.3 from a seven-week high to hit $1.2486.

While much of the risk appetite on display last week was driven by signs of a thaw in U.S.-China trade tensions, few fresh indications of progress left sentiment fragile.

Data released on Monday showed the slowdown in China’s economy deepened in August, with industrial production growing at its weakest pace in 17-1/2 years and retail sales weaker than anticipated.

That added to pressure for stimulus and in offshore trade the Chinese yuan weakened 0.25% to 7.0631 per dollar.

In the United States, investors who had begun trimming expectations for a U.S. Federal Reserve rate cut on Wednesday are now certain rates will fall and divided only over how much.

As for the Bank of Japan’s policy decision on Thursday, a third of economists polled by Reuters expect stimulus to be ramped up. But sources say it may be a close call as policymakers wait till the last minute to assess market reaction to the Fed’s decision hours earlier.

Japanese markets are closed on Monday for a public holiday.

The euro was steady at $1.1073.

Reporting by Tom Westbrook

Friday, 13 September 2019

Sterling eases off two-and-a-half month post-ECB high versus euro

LONDON (Reuters) - Sterling slipped a quarter of a percent on Thursday against the euro but firmed against the dollar, as the single currency enjoyed a broad rebound in the wake of the European Central Bank’s new stimulus announcement.

The ECB cut its deposit rate by 10 basis points and announced a bond purchase programme of 20 billion euros a month, starting from November, but the move failed to live up to some dovish market expectations, leading to some volatile euro moves.

The single currency had initially fallen after the ECB statement and touched a 2-1/2 month low against the pound at 88.86 pence.

It then rebounded across the board as ECB President Mario Draghi hinted at the limits of monetary policy and called on governments to expand budget spending.

By 1545 GMT the euro was half a percent higher versus the dollar and also rose 0.3% to the pound at 89.61 pence.

Against the dollar, sterling firmed 0.2% at $1.2351, close to $1.2385, a high it surged to on Monday when no-deal Brexit worries receded and some economic data came in better than expected.

The euro volatility came on a day of calm for sterling on the Brexit news front as investors weigh up Britain’s chances of securing a divorce deal with the European Union ahead of its scheduled departure from the bloc on Oct. 31.

With parliament suspended for five weeks by Prime Minister Boris Johnson — a move judged unlawful by Scotland’s highest court of appeal on Wednesday — traders lacked new Brexit developments to digest and stayed on the sidelines.

“For now, avoiding a no-deal Brexit by Oct. 31 is the only silver lining for the pound,” London and Capital Group told clients.

The court ruling has prompted calls for lawmakers to return to work as the government and parliament battle over the future of Brexit. Britain’s Supreme Court is set make a ruling next week.

Outcomes ranging from leaving without a deal to another referendum that could cancel the whole process are forcing some investors to stay away from the currency.

Instead they are trading implied volatility via options markets — two-month volatility, which stretches beyond the current Oct. 31 Brexit deadline, has come off three-year highs to around 9.40 vols. That is down from 15.45 vols on Sept. 3, the highest levels since the 2016 referendum.

Sterling’s steadiness was also partly due to the amount of short positions hedge funds held on sterling, analysts said. In the week to Sept. 3 leveraged funds reduced their positions slightly, but the amount of contracts, at $6.42 billion, was close to the highest since April 2017.

Reporting by Olga Cotaga and Sujata Rao