Dollar under pressure as US yields slide amid dovish FOMC statement
As broadly expected, FOMC members decided to leave monetary policy unchanged, maintaining the target range for the federal funds rate to 1% to 1.25% and not providing a clear timing about its balance sheet reduction plan. Little changes were made to the statement compared to the June version. The Federal Reserve acknowledged that inflation measures have declined and are now running below the 2% target. Most importantly, changes were made to the expected start of the balance sheet normalization program. In June statement, the Fed expected the program to be launched this year and it expects to be implemented ‘relatively soon’. Does the market has to worry about such a change?
From our standpoint, we think this is definitely a dovish adjustment to the statement as it removes clarity regarding the timing, giving more room to start the balance sheet run off. In reaction to this dovish modification, the US dollar was heavily sold off yesterday amid the release. The dollar index fell another 1.10% to 93.15, the lowest level since mid-June last year. Higher yielding currencies were the big winners with the New Zealand and Australian dollar rising 1.60% and 1.15% respectively.
A fresh batch of US data is due for release later today. Initial jobless claims should come in at 1960k versus 1977k a week ago. More importantly, after shrinking two months in a row, durable goods orders should have risen 3.7%m/m in June. Excluding transportation, the indicators should rise by 0.4%m/m compared to 0.3% in July.
After months of lacklustre data, investors have a real need to see some solid and uninterrupted flow of encouraging data from the US. This only under these conditions that we’ll see a bounce back of the US dollar and the pursuit of recovery in US yields.
VIX at an all-time low
The news did not make massive headlines. The VIX, the US volatility index which is also known as the ‘Fear Index’, just collapsed to an all-time low below 10. We recall that the 20-year average is above 20 for the index. A few weeks ago, Janet Yellen, Fed Chairman, warned markets about asset valuation which she considers as too high. Fed definitely believes that stocks markets are in a bubble. This is ironic as the Fed largely participated to underpin asset prices with free money.
While the volatility is at an all-time low, stocks prices are at an all-time high. There is then the potential relation between low volatility and high stock prices which could drive investors towards a sell-off. Markets are now in a pausing mode certainly fearing that consequence. However, stocks markets are not losing steam and may further head higher.
All eyes are on Fed now which balance sheet reduction should be discussed in November. Currency-wise the dollar is now trading at 14-month low on recent disappointment of Trump expected fiscal policies and Fed failing to fully deliver what was expected.
