Powell announces the need to add more bank reserves, but it won't be QE.

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD is trading near the lower end of its familiar 1.3280-1.3300 to 1.3330s range this morning as a broad “risk-on” wave sweeps over markets following some positive headlines on the US/China trade front.  Bloomberg is reporting that China is still open to a partial trade deal despite the US’s move to blacklist 28 Chinese tech companies.  The Financial Times says China has offered to raise annual purchases of US soybeans from 20M tons to 30M.   What is perhaps noteworthy too is a tweet from Chinese Global Times editor Hu Xijin suggesting that the Chinese delegation doesn’t plan to leave Washington early this week “based on what I know”.  The S&P futures have clawed back half of yesterday’s losses, November crude oil has rallied back above the 52.70 level that buyers shied away from yesterday, and the “Fed rate cut trade” is getting scaled back a bit (bonds and gold moderately lower).

Today’s North American calendar doesn’t feature much on the economic front, but we will have the weekly EIA oil inventory report at 10:30amET and some more Fed-speak (Fed’s Jerome Powell to speak at 11amET followed by the FOMC Minutes from the Sep 18th policy meeting at 2pmET).

Yesterday’s speech from Jerome Powell at the National Association for Business Economics has drawn intense criticism and debate amongst market participants during the overnight session, after the Fed chairman announced plans for another round of monetary policy intervention that would effectively increase the size of its balance sheet.  See here for the full speech.  Some are referring to these measures as QE4 (Quantitative Easing – Round 4), despite Powell’s insistence that it’s not.  Some are calling it federal debt monetization because part of the proposed purchase plan will now focus on US treasury bills (as opposed to bonds and MBS).  Some are focused on what now appears to be a permanent presence from the Fed in repo markets.

Our view is “call it whatever you want but the Fed keeps needing to intervening in markets”.  It keeps needing to stimulate or provide accommodation (whether that be via repo operations or by cutting interest rates), and the fact it continues to do this while telling markets that the economy is still “in a good place” is quite frankly alarming and disingenuous.  What is more, the Fed keeps getting its outlook wrong and it now seems to be flying by the seat of its pants (that's how we interpret Powell's “meeting-by-meeting” comment).  The Fed has gone from communicating rate hikes on a pre-set path during 2018, to a pause because of “transitory factors”, to an “mid-cycle adjustment” insurance rate cut, and now to a second rate cut (with a third now priced in for October 31 by the way).  Could it be that the economy is really not ok and that recession/systemic risks are rising?  Could it be that the QE programs that created all these excess bank reserves over the last decade never really amounted to liquidity for the banking system, and now the world has a real USD liquidity problem that the Fed is struggling to understand, but doesn't want to fall behind the curve on?  Could it be that balance sheet capacity/risk taking at banks is truly tapped and this is the reason why the global economy can’t seem to ever get off the ground?  

We continue to believe that the bond markets will lead the Fed and take it where it doesn’t want to go, but the trend lower in rates will continue to be bumpy so long as Powell continues to play the denial game.

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NOV CRUDE OIL DAILY

EURUSD

Euro/dollar is bouncing back above yesterday’s 1.0965-1.0975 support channel this morning as traders seemed to ride the coat-tails of a pop higher in GBPUSD earlier (more on this below).  We would say this is mildly positive technical signal for the market and we think buyers now have a shot at re-challenging the 1.10 figure again so long as it holds.

EURUSD DAILY

EURUSD HOURLY

DEC GOLD DAILY

GBPUSD

Sterling saw a spike higher in early European trade this morning after the EU said it was going to offer the UK a “major concession” on the Irish backstop, according to the Times.  More here.  This move quickly fizzed though after the UK’s DUP party reiterated its opposition and after subsequent EU sources denied the offer even exists.  GBPUSD now sits back below the 1.2240 level that capped prices in early NY yesterday awaiting the next major Brexit headline.

GBPUSD DAILY

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EURGBP DAILY

AUDUSD

The Aussie is trying to recover some lost ground this morning as global markets focus a more positive sounding US/China trade headlines, but the price action has been choppy and yesterday’s chart resistance level of 0.6750 is so far deterring the buyers once again.  We think there’s a risk AUDUSD could probe lower here to test trend-line support in the 0.6710s.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen has fully recovered from yesterday’s bout of risk-off as traders appear focused on the possibility of a “mini” trade deal with China.  US 10yr yields are trading moderately higher too, but they continue to struggle at the 1.56% level (which is why we think USDJPY has stalled at chart resistance at 107.40 in the overnight session).  Jerome Powell’s speech yesterday saw rates and USDJPY wobble a little bit, but we don’t think the bond market is honestly listening to the Fed’s optimism.  Next up is Powell’s speech at 11amET and the FOMC Minutes at 2pmET.

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US 10YR BOND YIELD DAILY

Charts: Reuters Eikon

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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