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Falling Down

by Stephen Casey | July 28, 2016

Good morning. The US dollar is sliding this morning, falling after the Fed cautioned on its outlook despite a more optimistic view. As expected, the FOMC kept its main interest rate unchanged, but a more optimistic statement was not enough to carry the dollar higher, which has fallen through the night as policymakers in the US choose to wait-and-see on its next big move. Tonight, the Bank of Japan will conclude its latest policy meeting and the broad market is split on whether we see some action or a similar wait-and-see approach. The yen has rebounded over the last two days, as has the euro which jumped more than 1% since Wednesday. Global equities were a touch lower and oil prices continued to dip even as the dollar experienced its worst day in almost two months.

Germany was under the microscope on Thursday as Europe’s largest and most important economy unveiled employment and inflation data for the month of July. Despite a better than expected rise in prices, inflation remains very low in Germany as prices rose 0.3% over the previous month and 0.4% over the last year. The euro went stop hunting during the early morning session, touching its best level versus the greenback since July 15th as German unemployment held firm at 6.1% for the second straight month. Sterling is one of the few currencies to lose ground versus the dollar on Thursday, continuing to slide as investors cycle out of pounds in favor of euros and other currencies. The Bank of England’s Weale’s bearish comments from Wednesday perhaps continuing to impact price action amid a gap in economic data.

Anticipation is building in Japan as the yen rose for the fourth time in six days before tonight’s BoJ policy announcement. On Wednesday, Japan’s prime minister revealed a surprisingly large 28 trillion yen stimulus package, which has ratcheted up pressure on the central bank to match with its own round of forceful easing and/or stimulus. For foreign exchange markets, the issue of “helicopter money” – giving money directly to consumers and businesses – is what will likely decide the yen’s fate.

As reported, the Federal Reserve took a noticeably un-dovish stance yesterday, keeping rates inside the 0.25-0.50% band and acknowledging that “near term risks” to outlook have been “diminished.” The Federal Reserve also noted that the labor market had “strengthened,” which was a big change from April when the committee noted the labor sector’s “pace of improvement had slowed.” The Fed added they continue to monitor inflation and global developments and with this upbeat statement, it has some in the market looking toward a “live” September meeting. In the few minutes following the release, the big dollar experienced a bounce before turning quickly and losing ground throughout the rest of Wednesday’s session. There was no specific timing on the next potential move on rates and added they expect “economic conditions will evolve in a manner that will warrant only gradual increases.” This wait-and-see approach has hurt the dollar throughout the European and Asian sessions. President of the Kansas City Fed, Esther George, voted to move the interest rate to 0.50-0.75% but the market still doesn’t see another hike until June of 2017. Chairman Yellen’s next big address will be on August 26th at the Economic Symposium in Jackson Hole, Wyoming.

On the docket this morning we had US weekly jobless claims, which continue to show a strong labor market. At 8:30am it was revealed that 266k Americans filed first time unemployment claims for the week ending July 22nd. This was more than had been expected but remains at historically low levels, having no impact on price action. Friday morning, second quarter US GDP is expected to come in at +2.0%, much better than the first quarter print which was a paltry +1.1% rise. The Canadian dollar has had another rough week, at one point falling lower by more than 2.5% to the greenback. Oil prices, which have fallen by more than $10-per-barrel since the pre-Brexit highs have weighed heavily on the Loonie with no concrete data until next Friday’s employment data. The Loonie has made some gains since the Fed but remains a sell on rallies as oil’s been unable to advance. Tomorrow, Statistics Canada will report producer prices for June and GDP growth for the month of May, both of which should go unnoticed.

 

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