September Rate Hike Is Out
Swissquote Bank Ltd | Sep 05, 2016 05:36AM ET
Forex News and Events
Jobs report dampens rate hike bets (by Arnaud Masset)
Over the last few weeks, Fed official reiterated their motto that the US economy was on a firmer footing and that the case monetary policy tightening became stronger. Unfortunately for the most hawkish Fed members, the last batch of economic data did not painted a bright picture of the world’s largest economy.
After a brief respite during the summer months (mostly July and August), economic data begun to surprise to the downside again. More interestingly, the job market, which was the mainstay of the Fed’s economic recovery story, has been sending mixed signal that suggest the job market is going through a period of stabilization rather than a period of expansion.
In August, the US economy created 151k private jobs, missing estimates of 180k and well below July’s figure of 275k. More worryingly, the negative trend seems to have accelerated over the last twelve months.
Over the last twelve months, average monthly gains eased to 204k jobs, while over the last six months, monthly gains eased to 175 - compared to 238k and 211k a year ago. This trend reversal clearly suggests that the bright days are behind us.
Similarly, after a solid second quarter, the manufacturing industry went under renewed pressure in August with the ISM manufacturing printing below the 50 threshold at 49.4, down from 52.6 in July (versus 52.0 median forecast). Markit manufacturing PMI remained stable at 52.0 (versus 52.1 in the previous month).
All in all, even before the release of last week’s disappointing economic data, we had already ruled out a September rate hike. It is now clear that it is out of the table. On the other end, December is still on the stable, but one has to see an improvement on the data side, unless the Fed will stand still.
After extending gains after the jobs report on Friday, the greenback came under renewed pressure on Monday as US markets are closed for Labour Day.
Market plays long game (by Peter Rosenstreich)
The weaker than expected US payroll report sent US lower against euro and EM however, most of Friday loses have already been recovered. The fact is that financial markets are playing the long game rather than become too involve in short-term volatility. In this long game the Fed will raise rates while the BoJ and ECB will be forced to ease further.
The Fed hike might come in December or March but steeper yields curves is coming. However, risk that BoJ goes off-the-reservations with nontraditional polices has increased significantly. Japanese economic data has become a serial disappointed while JPY remains economically crushingly strong.
BoJ Kuroda continues to play both sides by hinting extreme policy was not an option yet every tool was being considered. Overnight he indicated there is room for monetary policy easing through current mix including lower negative interest rates (expressing optimism at NIRP at Jackson Hole Symposium) and unorthodox policy strategies are being examined.
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Kuroda has indicated that “helicopter money”, the process of underwriting government bond and monetizing fiscal policy, should not be used. However, indicated that the BoJ was ready to take drastic actions is needed.
At the 20-21st September meeting BoJ has stated that the results of a "comprehensive assessment" of economy and prices under QE. Yet, without a “bazooka”, traders don’t expect the BoJ will have the ability to weaken the JPY and long JPY positions are growing.
In Europe risk are beginning to mount and so are the short euro positioned. On the political front, local elections in the North-Eastern German state of Mecklenburg-Vorpommern saw Chancellor Merkel’s CDU party dominated by populist AFD and right leaning SPD doing very well.
The European economic data post-Brexit has held up surprisingly-well but there is an overwhelming sense of dread that the storm has not past. Despite that ECB policy seem outdated and ineffective its remains marginally effective in subduing the euro bulls.
This week ECB meeting is expected to be used for technical adjustment to economic projections and/or extension of QE program. Yet, there could be a delay till December as the ECB waits for additional post-Brexit data.
In this long game thinking we anticipate EM will continue to outperform as global loose monetary policy and demand for yields will generate inflows.
EUR/CHF - Profit Taking.
The Risk Today
Yann Quelenn
EUR/USD is bouncing from hourly support given at 1.1123 (31/08/2016 low). It seems that buying pressures are important around this level. Key resistance is given at 1.1352 (23/08/2016 high) then 1.1428 (23/06/2016 high). Strong support can be found at 1.1046 (05/08/2016 low). Expected to monitor again 1.1100. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD keeps its upward move and has erased definitely hourly resistance at 1.3279 (26/08/2016 high). Last significant low can be found at 1.2866 (15/08/2016 low). Closest hourly support is given at 1.3253 (02/09/2016 low). Expected to show further upside pressures towards 1.3400. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY short-term bullish momentum is consolidating below 104.00. Hourly resistance can be found at 104.32 (02/09/2016 high). Hourly support is given at 102.80 (02/09/2016 low). A key support lies at 99.02 (24/06/2016 low). Expected to show renewed bullish pressures, yet a break of support at 102.80 may indicate a further bearish bias. We favour a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF is reversing. The bullish move has ended abruptly. The pair is set to head lower. Support can be found at 0.9739 (02/09/2016 low). Hourly resistance is given at 0.9885 (01/09/2016 high). Next resistance lies at 0.9956 (30/05/2016 high). Expected to further weaken. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
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