USD slides ahead of rate hike
By Peter Rosenstreich
The American economy has underwhelmed: the Federal Reserve will raise rates only 0.25% next week. Lack of a steeper hike has taken steam out of the USD rally and given risky emerging markets room to recover. The Turkish lira recovered, despite an inept economic plan. EUR/USD is near the top of the midterm range located at 1.1851. Euro Stoxx 50 futures are up, following the lead of U.S. stocks, which hit other record high, and Asian stocks that followed the US optimism.
US Treasury 10-year yields remain above 3.07%, rising but still historically low. Perhaps the market is mispricing the top of the Fed interest rate cycle. Risk appetite should remain buoyant, even though there are plenty of risks including rising trade tensions, Brexit, October German elections, US mid-term elections, Q4 corporate earnings and general geopolitics. Buy risk and volatility, but trade nimbly.
Japan inflation up
By Arnaud Masset
Japan’s August inflation beat forecasts as it rose to 1.3% annually compared to 1.1% expected and 0.9% in the previous month. Most of the upside surprise comes from fresh food prices. Even though inflation is only halfway to the Bank of Japan’s target, the core measure has been maintaining a positive momentum since April and the trend is set to continue in coming months.
USD/JPY rose 0.20% to 112.85 this morning amid renewed risk appetite. Equities rose across the board with the Chinese market surging most, thanks to rumours that China is about to cut import taxes for most of its trading partners. The timing suggests this is not only to stimulate domestic consumption but also to show the world that the country is of goodwill and continues to open up. We expect the yen will recover against the greenback as the BoJ reduces its bond purchases, while America’s central bank will likely slow its pace of rate hikes.