- FX traders kept on selling the US dollar during the Asian session as Fed Chairwoman Yellen delivered a cautious speech
- As we said yesterday, we anticipated that Janet Yellen would announce a hike delay
- American debt is way too large ($18 trillion) and interest on this debt would explode if interest rates increased too much
- Strong possibility of QE4 which would inject fresh money to save GDP
- The US dollar printed a fresh 16-month low against the Japanese yen, suggesting that traders believe the BoJ will be unable to weaken the yen further, while betting the Fed will have to remain sidelined for a longer period of time
- USD/JPY may find a first support at around 110, however the main support lies at 105.23
- The Aussie has been boosted by the potential delay of the next rate hike by the Fed, together with the solid performance of the Aussie economy against the backdrop of falling commodity prices
- The Kiwi is now reversing the trend toward the next support at around $0.66
In the wake of Janet Yellen’s testimony before the House Financial Services Committee in Washington; FX traders continued selling the US dollar during the Asian session as the Fed Chairwoman released a cautious speech. According to Yellen, the Federal Reserve is still on track to gradually raise short-term rates, however the recent market turmoil and uncertainties surrounding China’s growth prospect could weigh on US growth if proven persistent. A few days ago, Stanley Fisher, Fed Vice Chairman, also delivered a cautious speech reminding us that Fed policy will remain data dependent and that it was too soon to tell whether the current market conditions will prevent the Fed from moving on with its rate cycle.
***Yann Quelenn, market analyst: “As we said yesterday, we expected Janet Yellen to announce that the Fed would delay a hike. Yet, she has refused to admit that the current Fed strategy to achieve a normalized monetary policy has so far proven inefficient. She mentioned that overall financial conditions have become less supportive of growth. In particular that unemployment rates have lowered but better job conditions have not provided the awaited effect of a decent wage growth necessary to spur inflation toward the Fed’s target of 2%. Yellen also claims that she is wary of increasing rates too abruptly in case this pushes the economy in recession. The real truth is that American debt is way too large ($18 trillion) and interest on this debt would explode if interest rates increased too much. This is why, Yellen is even considering negative interest rates to avoid this from happening and especially to prevent a recession. Yet, at some point inflation is needed to destroy debt, but this is not on the cards anytime soon because in our view job market conditions are largely overvalued. As a result, we think that there is a strong possibility of a QE4 which would inject fresh money to save GDP. We are no longer in the era of monetary policy divergence or normalization. We are now firmly in negative interest rates territory and Yellen is considering this option despite the fact that she “is not sure if Fed can do it”***
Yesterday investors rushed into US treasuries and sent sovereign rates lower, especially on the short end of the yield curve. The 30-year yield settled down 10bps to 2.49%, while the 10-year yield also fell 10bps to 1.67%, suggesting that investors are becoming more pessimistic about the long-term outlook. The US dollar printed a fresh 16-month low against the Japanese yen, suggesting that traders believe the BoJ will be unable to further weaken the yen, while betting the Fed will remain sidelined for a longer period of time. USD/JPY is currently trading at around 112.75, down 0.50% in overnight trading. On the downside, a first support can be found at around 110 (psychological level and previous high), however the main support lies at 105.23 (low from October 15, 2014).
AUD/USD continued to push higher, remaining in its medium-term uptrend channel. The Aussie has been boosted by the potential delay of the next rate hike by the Federal Reserve, together with the solid performance of the Aussie economy against the backdrop of falling commodity prices.
The New Zealand dollar failed once again in an attempt to break the $0.6750 resistance and is now reversing the trend toward the next support at around $0.66.
Equities were broadly trading in negative territory as most Asian markets re-opened for trading. Hong Kong’s Hang Seng fell 3.88% after being closed for the last three days. South Korea’s Kospi settled down 2.93%, while in Singapore the STI fell 0.77%. Mainland Chinese markets will re-open next Monday. Be ready for the gap. In Europe equity futures are blinking green across the screen as concerns about the global economy weighs on traders’ mind. The German DAX was down 1.35%, the SMI -1.33%, the CAC -1.31% and the Euro Stoxx 600 -1.40%. US futures were also trading lower with contracts op the S&P 500 down 0.47%.
Today traders will be watching current account balance from Turkey; CPI from Switzerland; Riksbank interest rate decision (expect a cut); manufacturing production from South Africa; trade balance and gold and Forex reserve from Russia; Yellen’s speech before the Senate, initial jobless claims from the US; RBA governor’s testimony in front of the parliament committee.