· The U.S. dollar recovered slightly in early Friday trading, having fallen heavily after dovish comments from a key policymaker bolstered expectations of an aggressive interest rate cut this month.
At acentral banking conference on Thursday, New York Fed President John Williams argued for pre-emptive measures to avoid having to deal with too-low inflation and interest rates.
That sent the dollar down before it rebounded slightly after a New York Fed representative subsequently said Williams’ comments were academic and not about immediate policy direction.
Investors took Williams’ remarks along with separate comments from Fed Vice Chair Richard Clarida as another dovish signal from the central bank, which could be opening the way for a big rate cut at the end of this month.
· Investors are now pricing in a 25 basis point rate cut later this month, and some even expect a 50 basis point move, although the dollar has held up reasonably well.
· The euro weakened 0.2% to $1.1261 but remained firmly within its weekly range as traders wait for next week’s European Central Bank meeting.
The dollar index, which hit a two-week low of 96.648, bounced to 96.855.
The dollar did particularly well against the yen, rising 0.3% to 107.60.
· Following a volatile Asian session, the EUR/USD pair is seen receding the rally to 1.1282 highs amid downbeat German PPI data and broad US dollar comeback, in light of the NY Fed's clarification that saved the day for the dollar bulls.
EUR/USD seems to have created a minor double bottom pattern with the neckline resistance at 1.1286 over the last 13 days. A break above 1.1286 would create room for a rally to 1.1380 (target as per the measured move method).
As of writing, EUR/USD is trading at 1.1262, representing marginal losses on the day, having hit a session low of 1.1240 earlier today.
· Danske Bank analysts note that the market sentiment turned swiftly positive yesterday as prominent FOMC board members of the New York Fed, Williams and Vice Chair Clarida, delivered very soft remarks highlighting the need for swift action before economic data actually turns for the worse.
“The remarks at first seemed very coordinated, driving a weaker USD, a drop in front US yields and a sharp rally in the August Fed funds futures, essentially leaving market pricing skewed towards a 50bp July cut rather than the consensus 25bp cut. Meanwhile, this morning, the New York Fed stressed that Williams had not tried to send a specific policy signal, leading to a rebound of more than half the initial drop in US 2Y swap rates, even if the USD FX gains were more modest with EUR/USD, for example, staying around 1.1260.”
“Where does this leave us in terms of the Fed and the forthcoming 31 July meeting? Yesterday's remarks were highly surprising given the Fed's communication earlier this week that seemed to want to limit market pricing of a 50bp July cut. Meanwhile, with little time until the one-week silent period, markets now have a 25bp July cut at 60% and a 50bp cut at 40% probability.”
“We know that historically the Fed has not wanted to surprise markets at the meetings, leaving the coming sessions' FOMC comments crucial. For now, our call remains a 25bp cut at the 31 July meeting and an additional 50bp worth of cuts for the rest of the year. However, we must acknowledge the probability of this call getting modified towards a more aggressive July call if we get further very soft Fed remarks.”
· Like Ben Bernanke and Janet Yellen before him, Federal Reserve Chairman Jerome Powell may be worried that the central bank’s use of extreme policy during the financial crisis left him with a relatively small amount of fire power to head off the next economic decline.
That may make the idea of a so-called insurance rate cut later this month, an attractive option for the Fed chair, who looks determined to cut interest rates even as the domestic economy appears to be showing some signs of strength.
“It’s pretty incredible how strong the data has been. We added 224,000 jobs. We had an extraordinarily strong retail sales report; a 0.3% gain in core CPI month over month. Manufacturing surveys are rebounding. Jobless claims are hovering at cycle lows,” said Michelle Meyer, Bank of America head of U.S. economics. “The set of data heading into the next FOMC meeting is really quite robust.”
Yet, Meyer, like many Wall Street economists, expects Powell’s Fed on July 31 to pull the trigger on a quarter point rate cut, the first since 2008, and possibly the first of several. Traders increased their bets on Thursday that the Fed could cut even deeper later this month.
· U.S. and Chinese officials spoke by telephone on Thursday as the world’s two largest economies seek to end a year-long trade war, with U.S. Treasury Secretary Steven Mnuchin suggesting in-person talks could follow.
· Japanese Foreign Minister Taro Kono summoned and admonished South Korea’s ambassador on Friday in a deepening diplomatic dispute over compensation for Korean wartime forced labor that threatens global supply of memory chips and display screens.
The dispute took a tragic turn earlier on Friday when a South Korean man set himself on fire in front of the Japanese Embassy in Seoul in an apparent protest and later died from his injuries.
· Japan will go to the polls this weekend, and analysts are expecting the ruling coalition to win again — an outcome that would maintain political stability in the country amid a slowing economy.
Incumbent Prime Minister Shinzo Abe’s ruling coalition — the LDP and its partner, the Komeito party — currently has the upper house majority of 147 out of 242 upper house seats. There are 124 seats up for grabs in the upper house election on Sunday.
A pension report released in June by a government agency warned that many retirees in Japan will not be able to live on pensions alone. The report gave his opponents ammunition to criticize Abe’s government.
Meanwhile, Japan’s economy is slowing. Exports have declined while inflation fell in June to a two-year low, sparking speculation that the central bank could embark on more monetary easing, including lowering interest rates.
Still, Bank of America Merrill Lynch’s Devalier told CNBC that it was time for the government to rely more on fiscal spending.
Years of aggressive easing from the Bank of Japan have already pushed borrowing costs to or below zero, straining commercial banks’ margins.
· Oil prices rose on Friday as tensions brewed again in the Middle East after a U.S. Navy ship destroyed an Iranian drone in the Strait of Hormuz, a major chokepoint for global crude flows.
Benchmark crude prices were still on track for their biggest weekly decline in seven weeks, having fallen sharply earlier in the week on hopes for easing Middle East tensions as well as demand concerns and a dwindling U.S. storm impact.
Brent crude LCOc1 futures were up 81 cents, or 1.3%, at $62.74 a barrel by 0642 GMT, having risen to $63.32. Brent fell 2.7% on Thursday, falling for a fourth straight session, and was set for a weekly drop of more than nearly 6%.
West Texas Intermediate crude CLc1 futures rose 59 cents, or 1.1%, at $55.89 per barrel, after touching $56.36. They ended 2.6% lower in the previous session, and were headed for a weekly decline of more than 6%.
· The United States said on Thursday that a U.S. Navy ship had “destroyed” an Iranian drone in the Strait of Hormuz after the aircraft threatened the vessel, but Iran said it had no information about losing a drone.
· Iranian Deputy Foreign Minister Abbas Araqchi denied on Friday that Iran had lost a drone in the Strait of Hormuz after the United States said that a U.S. Navy ship had “destroyed” an Iranian drone.
“We have not lost any drone in the Strait of Hormuz nor anywhere else. I am worried that USS Boxer has shot down their own UAS [Unmanned Aerial System] by mistake!,” Araqchi said on Twitter, referring to a U.S. warship in the strategic waterway.
Reference: Reuters, CNBC
Thai
Eng