Reading through the September FOMC minutes, there seemed no sense of urgency from the Fed to get rates lower – even though it did cut by 50bp. More a sense that the inflation scare was over, unemployment was drifting higher and a risk management approach required a recalibration of policy. There were not any strong signals about how quickly rates would be cut to less restrictive levels and of course, the future pace of rate reductions would be data-dependent, ING’s FX analyst Chris Turner notes.
Geopolitical uncertainty to help USD
“The reason markets did not do much is that we’ve already seen a considerable adjustment in short-dated US rates since late September. The Fed’s terminal rate for this easing cycle has been repriced 50bp higher over the last few weeks. And short-dated yields have moved significantly in the dollar’s favour. EUR:USD two-year swap differentials have widened from 85bp to 130bp in about three weeks – no wonder EUR//USD is down towards 1.09.”
“Can short-dated US rates rise much further from here? We suspect probably not. But we could find out today should US September CPI come in slightly above consensus at 0.3% MoM. That will not be a deal-breaker for a 25bp cut from the Fed in November but perhaps will give the Fed a little less leeway to pursue more aggressive easing. Additionally, later today we have two more Fed speakers in the form of Tom Barkin and John Williams, both seen as modest hawks.”
“The FX market is choppy due to stimulus measures from China and ongoing instability in the Middle East. Investors anticipate the Chinese Ministry of Finance will announce CNY2-4 trillion in new bond issuance this Saturday, which is supporting commodity currencies. However, the bearish flattening of the US yield curve remains a negative factor for these currencies. DXY could make a bid for the 103.35 area should the US core CPI surprise on the upside today. Geopolitical uncertainty should also help the dollar.”
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