Dollar weakness was the main theme over the whole week. It started with worries over Trump’s tariff threats to Mexico. Then Fed officials came out acknowledging the risks from Trump’s tariff policies and signaled their openness to rate cuts should trade tensions worsen. Selling reached its peak after poor non-farm payroll report which gives a nod to monetary easing. However, the situation had an about turn, after market, when Trump declared that the tariffs on Mexico would be “indefinitely suspended” as a so-called “agreement” was made. So, the question is, are Fed officials now less worried? Or are they more worried by such high level of uncertainty? Anyway, a whole new world is possibly lying ahead for the greenback this week.

Over the week, Dollar was undoubtedly the weakest one. Yen followed as the second weakest. Major treasury yields dropped, with German 10-year bund hitting new record low. But Yen chose to follow surging stocks on Fed cut speculations. Sterling was the third weakest, saying farewell to UK Prime Minister Theresa May. New Zealand Dollar was the strongest one. Canadian Dollar was initially pressured by free falling oil prices, but then rebounded on stellar job report to close as second strongest. BoC is few of those who’s less likely to cut rates. Euro was the third strongest after less dovish than expected ECB announcement. Aussie was mixed only after RBA rate cut.

Speculations on Fed rate cut intensified drastically

Market speculations on Fed rate cuts intensified drastically last week. A key reason behind was Fed officials’ acknowledgement of risks from trade tensions, and their openness to rate cuts. Another factor was the poor non-farm payroll report, which showed only 75k growth in May, added to worries of slowdown in the economy.

Fed funds futures are now pricing 85.2% chance of rate cut by July meeting. That compares to 53.1% chance a week ago and just 14.4% a month ago.

By December meeting, it’s now at 86.4% chance that Fed will cut twice to 1.75-2.00%. A month ago, there was 84.8% chance that federal funds rate would be at 2.00-2.50%, that is at most one cut.

Fed officials signaled openness to insurance rate cut, but is that necessary?

However, to us, the markets were overly dovish on Fed. St. Louis Fed President James Bullard was the only one calling for a rate cut to provide “insurance” for “sharper-than-expected slowdown” as “global trade uncertainties have become more severe.” Chair Jerome Powell, Vice Chair Richard Clarida and Governor Lael Brainard just indicated they were ready to act on the implications of the developments in trade tensions. Chicago Fed President Charles Evans maintained that “our current setting has been appropriate”.

The most thoughtful one was Dallas Fed President Robert Kaplan’s. He noted “I want to take a little bit more time and be patient here, because some of these recent events could be reversed… Worth being cognizant of the fact that these recent tensions have just elevated in the last five, six weeks… And in the next five, six weeks, a number of them could be alleviated.”

Kaplan was right that in just a matter of days, threats of tariffs on Mexico vanished. With the experience of the the market volatility after Trump’s suddenly announcement of the tariffs on Mexico, would he still go ahead with tariffs on all untaxed USD 300B Chinese imports? If not, then there is is probably no more urgency for Fed to have those insurance cuts. Business confidence and investment will come back to the US if policies are not that erratic.

Dollar index confirmed medium term topping, but not reversal yet

Dollar index’s strong break of 97.20 support now serves as an important sign of medium term topping at 98.37, on bearish divergence condition in daily MACD. Some support could be seen from 55 week EMA (now at 96.10) to bring recovery. But risk will stay on the downside as long as 55 day EMA (now at 97.38) holds. Dollar index could gyrate towards 38.2% retracement of 88.25 to 98.37 at 94.50. We’d look at the structure of the fall to assess whether it’s just a correction or a change in trend at a later stage.

10-year yield pressing key support level, recovery due

10-year yield extended recent down trend last week and breached 61.8% retracement of 1.336 to 3.248 at 2.066 before closing at 2.084. We’d maintain that 2.034/066 is an important support zone that should hold at least on first attempt. A recovery is likely due that could help Dollar stabilizing. However, break of 2.356 support turned resistance is needed to indicate bottoming. Otherwise, further decline would remain in favor. The next fall could send TNX through 2.0 psychological level.

DOW looks on track to new high, but…

After edging lower to 24680.57 last week, DOW staged a very strong rebound to close at 25983.94, above 55 day EMA. The development seriously dampened our original bearish view that fall from 26695.96 is the third leg of consolidation pattern from 25951.81.

Strong support was seen from 38.2% retracement of 21712.53 to 26695.96 at 24792.28, as well as 55 week EMA (now at 25177.00). Both are rather bullish signal and suggest that rise from 21712.53 is not completed yet. If that’s the case, then rise from 21712.53 should indeed be resuming the long term up trend. That is, 26951.81 historical high should be taken out rather decisively soon.

But then, the current rally in stocks appeared to be fueled by expectation of Fed rate cuts, on slowdown in the economy. A rate cut while stocks are making new record high doesn’t make much sense to us. And, without the rate cut, the reason for the current rally on economic slowdown is non-existent. The situation is rather contradictory and thus, we’ll refrain from taking a view on US stocks for the moment.

ECB said rates to stay low till H1 2020, still confidence on baseline outlook

ECB left interest rates unchanged as widely expected. That is, main refinancing, marginal lending and deposit rates are kept at 0.00%, 0.25% and -0.40% respectively. The forward guidance was changed as the central bank said interest rates are going to stay at currently level for longer, “at least through the first half of 2020”, rather than end of 2019.

The post meeting press conference was not too dovish at all. In short, it just reflected, as President Mario Draghi described, “confidence in the present baseline, but also clear acknowledgement of risks”. Growth outlook for 2019 was revised up, but slightly down for 2020 and 21. Inflation outlook for 2019 was revised up, down for 2020.

Overall, ECB remains patient and would take more time to see how this year’s slowdown plays out, before committing to a move. The less dovish than expected meeting lifted Euro against Dollar and Yen clearly. However, there was no post ECB upside breakout in EUR/GBP, EUR/CAD, EUR/CHF, and not even EUR/AUD.

Suggested readings:

• Northern Exposure: ECB Concerned Over Prolonged Uncertainty
• ECB Promises Additional Easing If Needed
• ECB Not Dovish Enough – Low Rate to Stay until Mid-2020 and TLTRO Pricing Revealed.
• ECB Not Delivering to Market Expectations

RBA delivered rate cut, more on the table

RBA cut cash rate by 25bps to 1.25% as widely expected. The objective of the cut is to “assist with faster progress in reducing unemployment” and thus, “achieve more assured progress towards the inflation target”. More importantly, RBA leaves the option open for more rate cut. It will “continue to monitor developments in the labour market closely and adjust monetary policy” for the objectives.

Later, Governor Philip Lowe used to speech to confirm that more rate cuts are on the table. He said: “It is possible that the current policy settings will be enough – that we just need to be patient. But it is also possible that the current policy settings will leave us short. Given this, the possibility of lower interest rates remains on the table”.

Aussie ended the week mixed only. The rate cut and dovish path ahead should be rather well priced in for now. Aussie is supported as other global central banks, possibly except BoC, don’t appear to be in a much better position than RBA.

Suggested readings on RBA:

• RBA Moves Further Towards Additional Easing; FOMC to Deliver Two Cuts on Geopolitical Uncertainty
• RBA Lowe: Today’s Reduction in the Cash Rate
• RBA Lowers Policy Rate to 1.25%. Two of Big Four Pledge to Pass the Cut to Market in Full
• RBA Cuts Cash Rate and Leaves Open Prospects for Further Moves

USD/CAD Weekly Outlook

USD/CAD’s sharp decline last week suggests that choppy rise from 1.3068 has completed at 1.3564 already. Initial bias remains on the downside for 1.3052/68 cluster support. On the upside, break of 1.3363 support turned resistance is needed to indicate short term bottoming. Otherwise, outlook will remain bearish in case of recovery.

In the bigger picture, the strong break of medium term channel support now argues that up trend from 1.2061 (2017 low) has completed at 1.3664 (2018 high), just ahead of 61.8% retracement of 1.4689 (2016 high) to 1.2061 at 1.3685, and 1.3793 resistance. Decisive break of 1.3068 cluster support (38.2% retracement of 1.2061 to 1.3664 at 1.3052) will confirm and pave the way to 61.8% retracement at 1.2673 next. For now, risk will remain on the downside as long as 1.3564 resistance holds, even in case of strong rebound.

In the longer term picture, outlook remains unchanged that price actions from 1.4689 (2016 high) are forming a corrective pattern. Rejection by 1.3793 resistance would raise the chance of lengthier extension, with risk of dropping through 1.2061 low before completion.