Fed Turns Dovish, Dollar Steady, Central Banks In Focus

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EUR/USD Holds Steady Near Two-Month High as Fed Expected to Turn More Dovish Than ECB

Early on Tuesday, the euro is trading somewhat study against the US dollar, holding close to a two-month high over rising expectations for the Fed to turn more dovish than its European counterpart in response to the recent coronavirus outbreak. At the time of writing, EUR/USD is trading around 1.113.

Meeting central banks around the world have confirmed their interest in responding to the the economic risks of the outbreak, with G7 finance ministers and central bank officials scheduled to hold a call later today to discuss implications and a possible response. For now, markets have almost completely priced in a 0.25% rate cut by the Fed this month, which has driven weakness in the US dollar lately.

On the other hand, the ECB has limited room for further easing given that it already holds interest rates in the negative territory. This has helped the euro maintain its strength against the dollar in recent trading sessions.

Meanwhile, expectations for a more aggressive rate cut by as much as 0.50% this month are on the rise, weakening the US dollar index to the lowest level seen in six weeks and driving additional bullishness in EUR/USD.

U.S. stocks rise as focus turns to central banks

Vildana Hajric and Colin Beresford , Bloomberg News

Market board , Bloomberg News

U.S. equities gained, led by FANG shares, while European stocks pared losses following a mixed session in Asia as a big week for central-bank policy gets underway. Treasuries and the dollar nudged downward.

Facebook, Apple, Netflix and Google parent Alphabet led the Nasdaq Composite higher, while the Stoxx Europe 600 Index pared declines. Deutsche Bank boosted lenders on reports that it’s considering creating a “non-core unit” to wind down legacy assets as part of a broader overhaul. Japanese and Australian shares declined, while equities in Hong Kong rose after the government suspended a controversial extradition bill.

The dollar weakened after a Federal Reserve survey of factories in New York State plunged in June by the most on record, before trimming its loss. Treasuries pared a drop on the news, but they stayed lower alongside European bonds as investors looked ahead to a week in which the Fed, the Bank of Japan and the Bank of England all set monetary policy.

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Investors will be scrutinizing the Fed’s decision and messaging on Wednesday for signals on the chances of rates cuts ahead. Meanwhile, U.S. Commerce Secretary Wilbur Ross reiterated that the prospect of a major trade deal is unlikely to emerge from a possible meeting between President Donald Trump and Chinese President Xi Jinping at the Group of 20 summit in Osaka this month.

“We’ll find out Wednesday if the market is right about how dovish it is when it comes to monetary policy,” said Arthur Hogan, chief market strategist at National Securities Corp. “So what we’re looking for is affirmation of where the market is already, and anything that fails to affirm that probably is a negative toward the S&P 500.”

Elsewhere, oil futures were little changed as Saudi Arabia expressed hope that OPEC and its allies will agree to extend production cuts into the second half. Bitcoin jumped as much as 10 per cent, heading toward its highest close in more than a year.

Here are some key events coming up:

Federal Reserve, the Bank of Japan and the Bank of England all set monetary policy, along with central banks in Norway, Brazil, Taiwan and Indonesia. The Fed meeting begins Tuesday with a decision and press conference the next day. Officials are expected to debate a rate cut to shelter the U.S. economy, in part, from the fallout caused by escalating trade disputes. In the U.K. Tuesday there will be a second ballot on the leadership contest to choose Theresa May’s successor as leader of the country’s ruling party. Final May CPI data for the euro zone are due Tuesday.

These are the main moves in markets:

Stocks

The S&P 500 Index rose 0.3 per cent as of 10:52 a.m. New York time, while the Nasdaq Composite Index gained 0.8 per cent and the Dow Jones Industrial Average increased 0.2%. The Stoxx Europe 600 eased less than 0.1%. The MSCI Emerging Market Index dropped 0.3 per cent. The MSCI Asia Pacific Index fell 0.4 per cent, the fourth consecutive decline.

Currencies

The Bloomberg Dollar Spot Index fell less than 0.1 per cent. The euro rose less than 0.1 per cent to $1.1238, while the yen was little changed at 108.58 per dollar. The British pound fell less than 0.1% to $1.2583. The MSCI Emerging Markets Currency Index fell less than 0.1 per cent, the fourth consecutive decline.

Bonds

The yield on 10-year Treasuries rose 2 basis points to 2.10 per cent. Germany’s 10-year yield rose 1 basis point to negative 0.24 per cent.

Commodities

West Texas Intermediate fell 0.7 per cent to US$52.13 a barrel, the first drop in three trading sessions. Gold dropped 0.1 per cent to US$1,340 an ounce. The Bloomberg Commodity Index rose less than 0.1 per cent, the third consecutive gain.

–With assistance from Yakob Peterseil

Dollar edges up as more central banks turn dovish

The dollar edged up on Thursday as many of its peers weakened after more central banks shifted to dovish policy stances amid a deteriorating global economic outlook.

The latest switch came from the Reserve Bank of New Zealand (RBNZ), which stunned markets on Wednesday by saying the next move in rates is likely to be down, joining a growing list of central banks that had turned dovish.

The dollar index against a basket of six major currencies was 0.1 per cent higher at 96.879 and headed for its third day of gains.

With many of its peers going on the defensive, the dollar has been able to brush aside a decline by benchmark U.S. Treasury yields to 15-month lows.

“Treasury yields are indeed lower. But this isn’t impacting the dollar very much as Treasury yields are still at attractive levels relative to those in the euro zone and now New Zealand, which has just turned dovish,” said Takuya Kanda, General Manager at Gaitame .Com Research Institute.

“It is currencies like the euro, which is being dragged down by negative German yields, and the New Zealand dollar, which are suffering losses and allowing the dollar to rise in turn.”

The euro was a touch higher at 1.1253. The single currency has still lost 0.45 per cent this week with the benchmark 10-year bond yield having fallen to 2-1/2-year low of minus 0.09 per cent.

The euro’s upside was limited after European Central Bank President Mario Draghi said a hike in interest rates could be further delayed.

Growth-sensitive currencies have taken a beating recently on rising risks to the global economy highlighted by the shakeout in U.S. bond yields, which markets have read as a signal of a future recession.

The New Zealand dollar crawled up 0.25 per cent to 0.6815 dollar, after sliding 1.6 per cent the previous day.

The Australian dollar, which often moves in sympathy with the kiwi, added 0.15 per cent to 0.7096 dollar.

The Reserve Bank of Australia last month abandoned its long-held tightening bias, and markets there are pricing in a cut this year.

The Aussie had shed nearly 0.7 per cent on Wednesday along with the plummeting kiwi.

The pound was flat at 1.3188 dollar after going as low as 1.3143 dollar earlier on Thursday.

Sterling was capped after an offer by British Prime Minister Theresa May to quit to get her European Union divorce deal through parliament failed to win over key opponents of the agreement.

Britain was supposed to leave the bloc on Friday but Brussels agreed last week to put back the divorce date until April 12 to give it a chance to resolve a three-year crisis that has split the country down the middle.

However, it still remains uncertain how, when or even if the United Kingdom will leave the EU.

Daisuke Karakama, Chief Market Economist at Mizuho Bank in Tokyo, said the prospect that Brexit could be scrapped altogether through another referendum is a potential risk that could weigh on the yen.

“A second referendum resulting in ‘remain’ would fuel risk appetite and cause the yen to be sold. The shock from such an outcome could equal that of the first referendum,” Karakama added.

The yen, a perceived safe haven, had rallied hard in June 2020 when Britain chose to leave the EU through a national referendum, causing massive risk aversion in the financial markets.

The yen was 0.3 per cent firmer at 110.19 to the dollar amid a slide in Japanese shares, but it was still some distance away from a six-week peak of 109.70 scaled on Monday.

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