- FOMC hikes and turns hawkish
- Carney is speaking to EU parliament.
- US dollar rallied yesterday and consolidate gains overnight.
USDCAD open: 1.3995, overnight range 1.3981-1.3998, close 1.3987, WTI 101.33, Gold 4,305.63
The Canadian dollar dropped after the Fed delivered its expected 25 bp rate hike, then signalled that further increases could be on the way. The move itself had been fully discounted by markets. What caught investors off guard was the hawkish guidance that accompanied it.
Canada-US 2 and 10-year yield spreads initially widened following the Fed announcement, although both have since retraced some of that move. The recovery in the differentials has helped reinforce resistance around the 1.4000-1.4010 area.
Prime Minister Mark Carney told the European Parliament that Canada needs a deeper relationship with the EU as a way of reducing its vulnerability to pressure from larger powers.
Yesterday, the Fed raised rates to 4.00%, with Chair Warsh defending the decision by pointing to a resilient economy, loose financial conditions and stalled progress on inflation. Markets now see better than a 50% chance of another hike before year-end, particularly after Warsh said he would be “hard-pressed to describe broad financial conditions as restrictive.”
Asian equity markets closed on a mixed note. Japan’s Topix climbed 0.80%, Australia’s ASX 200 gained 0.41%, while Hong Kong’s Hang Seng declined 0.44%.
As of 7:05 AM, European bourses have shrugged of the Fed hike and are higher. The German Dax has gained 0.45%, the French CAC 40 is up 0.23% and the UK FTSE 100, has risen 0.22%. S&P 500 futures are up 0.87%, the 10-year Treasury yield is 4.971%, and the DXY is 100.18 .
EURUSD took a beating after the FOMC announcement despite the rate hike itself being fully priced. The problem was that the market had expected a hike, but not necessarily the prospect of another one. The Fed’s hawkish message, combined with oil prices remaining elevated, pushed the pair through support around 1.1500-10. EURUSD remains in a downtrend while below 1.1550. Eurozone HICP increased 0.3% m/m in August, slightly below the 0.4% expected and July’s reading.
GBPUSD idled in a 1.3350-1.3407 range overnight. Prices drifted to the bottom of the band after the Bank of England left its benchmark rate unchanged at 3.75% which was expected. Governor Bailey’s press conference is just starting.
USDJPY surged to 156.41 following the FOMC decision before consolidating overnight gains. The Bank of Japan delivers its policy decision tomorrow, with a 25 bp increase to 1.25% expected. The BoJ may need to adopt a similarly hawkish tone to the Fed to prevent another USDJPY rally. Prime Minister Sane Takaichi has reshuffled her cabinet, while her Economy Minister said Japan would not engage in “wanton fiscal expansion.”
AUDUSD is recovering some of its post-FOMC losses as expectations increase for the RBA to raise rates to 4.60% on September 29. The IMF is calling on the Australian government to reduce spending and has lowered its 2027 economic growth forecast to 1.6% from 1.7%.
Canada’s data calendar includes the August Industrial Product Price Index and Raw Materials Price Index.
The US releases jobless claims, building permits, housing starts and the Philadelphia Fed Manufacturing Index. Given the Fed’s unexpectedly hawkish outlook, the data may struggle to generate much market reaction unless there is a significant surprise.
