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Collinson FX: September 18 - US interest rates to remain low for years

by Collinson FX 18 Sep 03:52 PDT 18 September 2020
C-TECH - 12ft Skiff - Waitemata Harbour - September 12, 2020 © Richard Gladwell / Sail-World.com

Collinson FX: September 18 - US interest rates to remain low for years

Central banks caused extreme volatility in equity markets overnight, while interest rates and currencies remained stable. The Federal Reserve left rates and QE unchanged, while the Bank of Japan and Bank of England followed suit. The Fed also assured markets that interest rates would remain at historical low levels, for years to come, encouraging investors. The Central Bank commentary was keenly awaited, with the Bank of Japan observing the economy ‘has started to pick up’, but remained in a ‘severe situation’. The Bank of England echoed this sentiment, warning risks and uncertainty remained high, despite stronger than expected economic news. This hit equity markets hard in Europe and early US trade but a recovery was underway.

The Dollar remains reliably in remission, with the EUR trading 1.1830, while the Yen has rallied to 104.70. The GBP remains under pressure, as trade talks with the EU appear to be failing, but the real downside remains the economy and re-opening. Central Bank monetary stimulus, through record low interest rates and ‘QE Infinity’ will continue to drive markets, until deficit and debt are once again recognised.

The Australian Employment data was stronger than expected, adding 111,000, jobs driving the headline rate down to 6.6% (from an expected 7.7%)! These bullish numbers were not reflected in the currency, with the AUD tumbling back to 0.7260, although a late recovery in US equities and sentiment returned the currency back above 0.7300 on the open. The NZD was static in the previous days trade, after GDP data contracted 12.2% for the quarter, better than expected but confirming a deep recession. The KIWI will open much stronger, as US equities staged a late recovery, from substantial early losses.

Collinson FX: September 17 - Equity markets surge on low US interest rates news

The Federal Reserve ended their latest meeting, promising to maintain record low interest rates for years! This was a shot in the arm for equity markets, which surged on the news. This is likely to be the last we hear from the Fed before the Presidential election, as they avoid any perception of criticism or intervention in the process. US Retail Sales were lower than expected, but the Housing industry continues to flourish, with the NAHB House Market Index, smashing expectations. There is talk that congress may surprise ‘any and all’ and pass an emergency fiscal stimulus bill, hinted at by the Trump administration. The Dollar settled on the FOMC announcement, with the EUR trading 1.1830, while the GBP slipped back below 1.3000.

Markets still await news from the Bank of England and Japan, which will present similar results as the FOMC. Japanese Exports contracted 14.8% in August, while the UK battles through unrewarding trade negotiations with the EU. These pressures may encourage some action/comment from their respective Central banks. The AUD consolidated above 0.7300, while the NZD pushed up above 0.6730, after the NZ Treasury released the Pre-Election Fiscal update. This was an ocean of long-term bad news, but as expected, thus little impact. NZ GDP news may impact in today's trade of the KIWI?

Collinson FX: September 16 - Positive US news extends to Europe

Global equity markets continued to book gains, supported by re-opening of markets and improving economic activity. Chinese Retail Sales expanded, as did Industrial Production, looking to a ‘return to normal’. The theme of positive news extended to European markets, with German and EU ZEW Economic Sentiment reports, improving at a greater rate than expected. In the US, the Empire State Manufacturing Index, also jumped at a greater margin than expected. This combines with imminent progress on the push towards a global vaccine, while big advances are being made in treatment and cures, allowing infection rates to rise but mortality rates to plunge.

Markets are now turning their attention to Central Bank interest rate decisions. The FOMC, Bank of England and Japan are all making their interest rate decisions and announce future monetary policy. All are likely to maintain current extremely expansive monetary policy and record low interest rates, supporting investment and debt management. The EUR traded 1.1850, while the GBP regained 1.2900, amidst faltering Brexit trade talks.

The RBA released the minutes of their latest meeting and confirmed that they will ‘maintain highly accommodative settings’, for as long as is needed. This supported the AUD, which rose to 0.7300, while the NZD regained 0.6700. Central Banks will hold their record liquidity as debt explodes across the globe. Interest rates are no longer an instrument of risk measurement, but a mechanism to expand and support debt.

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