USD losing interest rate support

KBC Market Research Desk KBC Bank

Uncertainty on the global economy continued to haunt (equity) markets yesterday. US equities were hit hard and investors questioned the path of further Fed rate hikes in 2019. Poor US data, including a substantial further decline in NAHB housing confidence added to uncertainty. US yields nosedived. Sentiment on markets outside the US also turned further negative, but the loss of interest rate support this time prevented the dollar to fulfil its safe haven role. The US currency underperformed the euro and the yen. EUR/USD closed the session at 1.1348 (from 1.1306). USD/JPY finished at 112.83 (from 113.39). The risk-off trade spreads further to Asia overnight, even as losses are smaller than in the US yesterday. In a long-awaited speech, Chinese president XI Jinping confirmed the need for further reforms but didn't provide much info on new initiatives to address the current slowdown or on the US-China trade relations. The dollar maintains yesterday's decline. EUR/USD hovers in the 1.1340 area. The yen profits (albeit modestly) from a safe haven bid. USD/JPY trades in the 112.60 area. The yuan (USD/CNY 6.8970 area) trades little changed despite the risk-off. The kiwi dollar was supported by strong domestic confidence data. NZD/USD rebounded to the 0.6850 area after recent setback.

Later today, the German IFO business confidence will be published. In the US, housing starts and permits are scheduled for release. On both sides of the Atlantic, markets look for clues on a potential further slowdown. Recently, the repositioning on US markets was at least as violent as was the case in most non- US markets. Question is whether the USD will lose further interest rate support going into tomorrow's Fed policy meeting. We expect the Fed to remain much more positive on the economy (and on policy normalisation) compared to current market pricing. In theory, this should support the USD. However, at least until now, the market wasn't inclined to embrace a (modestly) positive US eco scenario. The dollar traded rather neutral and didn't profit from safe haven flows. More technical trading in the EUR/USD 1.12/1.15 trading range might be on the cards going into the Fed rate decision. EUR/GBP didn't go anywhere yesterday and meandered in the high 0.89 area as the political stalemate on Brexit persists. An attempt of labour to trigger a no confidence vote failed. UK PM May indicated that she will continue negotiations with the EU going into early next year. This might bring some temporary calm for sterling. Still we avoid sterling long exposure.

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KBC Market Research Desk

KBC Bank

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