Rates: Fed to deliver soft message
Fed chair Powell is expected to announce the end of the balance sheet run-off by the end of the year. Communication on the future composition of the BS is a wildcard. We expect the total amount of rate hikes in the dot plot to fall from 3 to 1. Most should be discounted on rate markets, but this soft message creates space for more bonds gains over the MT.
Currencies: Dollar has discounted by and large a soft Fed
Today’s currency price action will be driven solely by the Fed. Recent dollar weakness suggests that a dovish Fed is probably discounted. We anticipate sideways trading ahead of the Fed with some risks of EUR/USD profit taking afterwards. UK PM May is running out of time to find consensus on the length of the brexit deadline extension
The Sunrise Headlines
- US equities started strong but eventually closed unchanged following reports that some US officials are concerned China is pushing back against American demands. Asian bourses are mixed with China (-0.5%) underperforming.
- Despite concerns of Chinese stalling in trade talks, US Trade representative Lighthizer and Treasury Secretary Mnuchin are to travel to China next week for another round of high-level discussions with Chinese Vice Premier Liu He.
- Chinese President Xi Jinping will sign agreement with Italy and France over the next days to enhance synergies and trade relationships with the EU on its Belt and Road initiative.
- Czech National Bank’s vice governor Mora told Bloomberg yesterday that he expects one more rate hike this year, but it probably won’t happen at next week’s policy meeting (Mar 28).
- RBA Bullock worries that the large influx of supply on the Sydney apartment market might exacerbate declines in housing prices and worsen households’ financial positions. She called on banks to loosen lending conditions.
- Canada’s Liberal government presented a pre-election budget including over $10bn in spending to counter the worsening economic backdrop and prop up voter support for the scandal-hit PM Trudeau and his government.
- Today’s economic calendar centres on the FOMC’s verdict. The US central bank is expected to join the ECB’s dovish swing. UK inflation data and a German Bobl auction are the other items on the agenda.
Currencies: Dollar Has Discounted By And Large A Soft Fed
Soft Fed discounted after recent USD weakness?
EUR/USD was well bid yesterday. The couple eked out gains as investors avoided excessive USD long exposure ahead of a cautious expected Fed meeting (tonight). At the same time, euro buying found support in a positive surprise of Germany’s ZEW confidence (expectations component) and an overall constructive risk climate. However, the latter was shaken by conflicting reports on trade later on. Some US officials are concerned China is resisting US demands. China also stepped back from earlier trade promises it made, saying they do so because there haven’t been any assurances from the US that tariffs would be lift. The EUR/USD uptrend stalled. The pair closed at 1.1352 (from 1.1337). USD/JPY closed a choppy trading session stable at 111.39.
Asian markets are trading mixed this morning. Chinese equities underperform following the trade reports. The Chinese yuan opened slighty lower but has recovered most losses soon after. The Aussie (AUD/USD 0.708) similarly staged a turnaround after slipping as the RBA said that risks to financial stability have become ‘elevated’. Minutes of the BoJ showed disagreement among its members over monetary easing. One member said the BoJ should avoid market expectations of no change in policy to be fixed to ‘an excessive degree’. USD/JPY is trading at 111.55, up from 111.40.
Today’s economic calendar is extremely thin. The Fed meeting tonight will have market’s undivided attention. We expect the central bank to reduce its anticipated 2019 rate hikes from 2 to 1 with no hikes penciled in for 2020 (vs. 1 in December). Powell will probably also announce the end of the balance sheet run-off by the end of the year. We believe the dollar at the current levels has discounted a soft Fed. That might result in sideways EUR/USD trading ahead of the Fed with some risks of profittaking afterwards. More so because any further sustained rebound in EUR/USD probably needs better EMU data first.
Sterling entered calmer waters yesterday after the UK’s Speaker of the House thwarted May’s brexit strategy. Markets are now awaiting the PM’s next steps which would consist of asking the EU to extend the deadline. Reports suggest she seeks at minimum a 3m extension. It is unclear however how the EU will respond at the summit tomorrow. We don’t expect the brexit process to be clarified soon and stay cautious on sterling. The 0.8490/0.85 area might become a ST floor for EUR/GBP.
EUR/USD: dollar has by and large discounted a soft expected Fed
