Yesterday’s big market moves during North American trading hours sent shockwaves through overseas markets and continues to have an impact on trading activity this morning. European markets have been staging catchup rallies, particularly the FTSE with its higher weighting in energy and mining. US index futures are also up, indicating follow-through from the bullish camp.
After staging a major rally through 2015, USD had outperformed pretty much everything, mowing down everything in its path building in expectations of an aggressive rate hike from the Fed and aggressive additional stimulus from the ECB and elsewhere. Since November, however, the tide had been turning. The US Dollar Index failed to clear 100 in November and since then failed to rally on what should have been dollar supportive news like the Fed rate hike and stimulus moves from the ECB and Bank of Japan, indicating diverging monetary policies had been fully priced in to the greenback.
A top had been forming in USD over the last few months, but yesterday was the day that support finally gave way and the dollar plunged, kicking off a new downtrend. The straw that broke the camel’s back were comments from New York Fed President Dudley, one of the big 3 at the Fed who indicated tighter financial conditions is a matter of concern to the Fed in contrast to KC Fed President George who said Tuesday it was not a concern and not unexpected. Dudley also suggested a weaker global economy and a stronger USD could hurt the US economy. The negative impact of the higher dollar should not have come as a surprise to anyone who has followed the chorus of complaints from US captains of industry about the negative impact of the higher USD on their earnings for the last several quarters.
Still, it now appears that USD has turned downward with traders increasingly recognizing that the greenback has likely priced in a much more hawkish Fed than we are likely to see.
The trend toward dovish talk if not action continued at this morning’s Bank of England meeting where the surprise was in the vote total as MCP member Ian McCafferty dropped his hawkish dissent and joined the party line over concerns low inflation could hinder wage growth. Cuts to the Bank’s GDP and inflation forecasts to the UK confirm that the central bank is likely to remain on hold for a long time to come (I would expect a central bank about to raise rates to increase its forecasts as the Fed did last September ahead of the December increase).
In fact, in its inflation report, the Bank noted that its forecasts assume rate liftoff in mid-2017, it wasn’t that long ago everyone was thinking mid-2016. That being said, Governor Carney indicated the MPC still thinks the next rate move will be up likely in a bid to crush recent speculation that the MPC could be prepping for a rate cut which shored up support for GBP.
GBP is underperforming all other majors on this news but is only down slightly against USD indicating that much of this dovishness had already been priced in and that the main focus remains on the USD rollover, particularly with gold still climbing.
Resource currencies and commodities exploded through resistance for big breakout gains on yesterday’s USD plunge. One of the strongest technical moves was in crude oil which dropped briefly on a bigger than expected US inventory build then took off to the upside, a sign that bears have become totally exhausted and washed out of the market for now.
Crude oil received early support from talk out of Russia that it remains open to talking about stabilizing the market. Rumours appeared in the afternoon that six OPEC and non-OPEC countries have agreed to hold a meeting but there have been so many rumours and denials that I’ll believe it when I see it and even then there’s no guarantee participants will stick to their promises. Still today’s trading action in oil holding up near $32.00 on WTI after such a big move is encouraging technically.
The oil rally continues to have a positive impact on oil sensitive currencies with CAD and NOK topping the major league standings and RUB rallying as well. With copper and gold also higher today we could see energy and mining stocks in Canada and the US attract significant attention from traders again.
Looking to today, the big news is pretty much already out except for mid-level reports like US jobless claims. We still could see some intraday volatility should the bears mount a counter-attack (and if they can't would be a telling sign too) or if the bulls decide to pause. We may also see positioning through the day as traders prepare for tomorrow’s US and Canada employment reports.