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Dollar tumbled steeply overnight on Fed chair Jerome Powell's awkward dovish turn. Within a matter of weeks, interests rate went from being "long way from" to "just below" neutral. Markets took that as a sign Fed is nearing a pause in the current hike cycle. DOW staged a decisive 617.7 pts or 2.50% rally. Minutes of November FOMC minutes could reveal whether Powell has turned during that meeting. Plus, we might see whether other policymakers thought interest rate was just below neutral.

The greenback stays weak in Asian session and fresh selling is seen after lunch. On the other hand, Yen is surprisingly picking up some buying together with Swiss Franc and Euro. For the week, though, Yen is the weakest one, followed by Canadian Dollar. Kiwi and Aussie are the strongest.

Technically, more downside is now in favor in Dollar for the near term, except versus Canadian. In particular, 1.1472 resistance in EUR/USD, while far, is a key resistance level to watch. Break could complete a head and shoulder bottom pattern and indicate reversal in the pair. AUD/UD is now back pressing 0.7314 and sustained break will also indicate bullish reversal.

In other markets, major US indices recorded solid gains overnight. DOW rose 2.5%, S&P 500 jumped 2.30% and NASDAQ gained 2.95%. Treasury yields were mixed though. Five-year yield closed down -0.029 at 2.856. 10-year yield dropped -0.011 to 3.044. But 30-year yield rose 0.010 to 3.329. Asian markets followed with Nikkei trading up 0.69%, China Shanghai SSE up 0.28% and Singapore Strait Times up 0.83% at the time of writing. But Hong Kong HSI is down -0.13%.

Fed Powell said rate "just" below neutral

Dollar dived sharply as Fed Chair Jerome Powell seems to be backing down from his monetary stance, facing political pressure from Trump. The key take away is that Powell said " Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth." That is, in Powell's view, federal funds rate at 2.00-2.25% is "just below" neutral.

However, it should be noted that in September projections, median longer run projected federal funds rate was 3.0%. Central tendency was at 2.8-3.0%. And the range was from 2.5-3.5%. 2.00-2.25% couldn't be considered being "just below" 3.0%, nor 2.8-3.0%. Also, back on October 3, Powell said "We may go past neutral, but we're a long way from neutral at this point, probably" Powell in his own words on October 3 in this video. Just in case, start at 8:00.

More in Fed Chair Powell's U-Turn on Interest Rates?

Trump studying auto tariffs again after GM plants closure

Trump blamed other car exporting countries for taking advantage of the US for decades. And he claimed that if the 25% "chicken tax" is imposed on cars, GM would not be closing their plants in Ohio, Michigan and Maryland. And because of GM event, auto tariff is being studied now.

He tweeted. "The reason that the small truck business in the U.S. is such a go to favorite is that, for many years, Tariffs of 25% have been put on small trucks coming into our country. It is called the "chicken tax." If we did that with cars coming in, many more cars would be built here …..and G.M. would not be closing their plants in Ohio, Michigan & Maryland. Get smart Congress. Also, the countries that send us cars have taken advantage of the U.S. for decades. The President has great power on this issue – Because of the G.M. event, it is being studied now!"

BoE projects GDP to be 1.75% higher in close partnership with EU after Brexit

Following the UK Government, BoE also released it's economic analysis of different Brexit scenarios yesterday .

In short, in case of economic partnership with EU after Brexit, and relative to November Inflation Report (IR), by end of 2023:

• GDP is 1.75% higher in the close partnership scenario
• GDP is -0.75% lower in the less close partnership scenario
• Unemployment rate will be at 4%, slightly lower than the IR
• Inflation is a little lower reflecting appreciation of Sterling and peat at 2.25%

In case of no deal, no transition, relative to November IR, by the end of 2023, in worst case:

• GDP is -4.75 to -7.75% lower
• Unemployment rate will jump to 5.75-7.50%
• Inflation will peak at 4.25 to 6.25%

BoJ Masai: Best to sustain current ultra-loose monetary policy

Bank of Japan board member Takako Masai said price growth remained weak in Japan even though growth was solid. And, "as such, the best approach would be to sustain the current ultra-loose monetary policy. With that "the positive momentum is not disrupted," regarding inflation moving back to 2% target.

She also noted that "Monetary easing can stimulate the economy. On the other hand, prolonged low rates could have adverse effects on bond market functions and financial institutions' profits". Thus, "in guiding monetary policy, the BOJ must thoroughly scrutinize the costs and benefits of its policy from various perspectives."

On BoJ's move to allow 10-year JGB yield to move from -0.1% to 0.1%, she that "Such flexible measures the BOJ took will help sustain sound market functions."

New Zealand business confidence unchanged, main threat to growth is offshore

New Zealand ANZ business confidence was unchanged at -37.1 in November. Activity outlook rose 0.2 to 7.6. ANZ noted that "Left well enough alone, the New Zealand economy can muddle through. Population growth is cooling, and household debt is very high, but interest rates are stimulatory, the terms of trade are high, and dairy production is off to a boomer."

"The main threat to growth is in fact offshore, with mounting evidence that global growth is slowing (particularly in export powerhouses such as China and Germany), which is an unhelpful backdrop for already-wobbly equity and credit markets. New Zealand is a small, open economy reliant on foreign capital, and what happens offshore can have a big impact."

Elsewhere

Japan retail sales rose 3.5% yoy in October versus expectation of 2.7% yoy. Australia private capital expenditure dropped -0.5% in Q3, below expectation of 2.0%.

The economic calendar is rather busy ahead. Swiss will release Q3 GDP. France will also release Q3 GDP. Germany will release CPI and unemployment. Eurozone will release confidence indicators. UK will release mortgage approvals and M4.

Later in the day, US will release personal income and spending, jobless claims and pending home sales. But FOMC minutes will catch most focus. Markets would like to see whether there are other FOMC members seeing interest rates as "just below" neutral too.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.1290; (P) 1.1341; (R1) 1.1417; More.....

EUR/USD rebounded strongly after hitting 1.1267 and intraday bias is turned neutral first. Focus is now on 1.1472 resistance. Decisive break there will complete a head and shoulder bottom pattern (ls: 1.1302; h: 1.1215; rs: 1.1267). That will indicate near term reversal and bring stronger rise back to 1.1814 resistance. On the downside, below 1.1267 will turn bias back to the downside for 1.1215 low.

In the bigger picture, down trend from 1.2555 medium term top is still in progress and should target 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. On the upside, break of 1.1814 resistance is now needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of strong rebound.

Economic Indicators Update

Stock markets rallied after Fed Chair Jerome Powell’s speech at the Economic Club, New York. Market players were thrilled amid their interpretation that Powell has turned dovish, probably succumbed to Trump’s endless criticism. We do not see an abrupt turn on Powell’s stance.

What the market focused on was Powell’s reference that “interest rates… remain just below…neutral”. This has led some to expect that Fed’s rate hike path is coming to an end. Those who got so excited after Powell’s speech probably tried to compare the current Fed funds rate with the median dot plot. In September, the staff’s projection of neutral rate ranged from 2.5% to 3.5%, with the median at 3%. Such projection would probably be similar in December. With the current Fed funds rate target range at 2-2.25%, with the mid-point at 2.125%, the Fed might only raise the policy rate by about three times ((3%-2.125%)/0.25% = 3.5 times).

The concept of “neutral interest rate” is often misinterpreted. It is in fact the level of interest rate that would neither speed up nor slow down economic growth. This interest rate is not fixed, as it can be changed over time in accordance with economic development. Indeed, the Fed has always emphasized that it does not know where the neutral rate is. Moreover, there is no such rule that rate hike has to stop after reaching the neutral rate or that the policy rate cannot exceed the neutral rate.

In September, the median dot plot pointed to a neutral rate of 3%. Yet, the projected rate for 2019 and 2020 were 3.1% and 3.4% respectively. therefore, it is imprudent to assume that the Fed funds rate at an economic cycle should peak at/below the neutral rate. Powell suggested October 3 that the Fed might raise rates past neutral, and there is probably “a long way” from that point. We do not see his latest comment as contradictory from this. Indeed, Powell also affirmed that current interest rates” are still low by historical standards” in his latest speech.

Independence is of utmost importance for a central bank to perform its functions effectively. The government in power certainly hopes to boost growth and reduce unemployment rate without limit. This is the best way for them to gain popular support. If governments/ political parties are allowed to intervene monetary policy, they would likely be incentivised to keep interest rates low for promoting growth. In this case, central bank's ability to stablise inflation would be compromised.

New Zealand ANZ business confidence was unchanged at -37.1 in November. Activity outlook rose 0.2 to 7.6. ANZ noted that "Left well enough alone, the New Zealand economy can muddle through. Population growth is cooling, and household debt is very high, but interest rates are stimulatory, the terms of trade are high, and dairy production is off to a boomer."

"The main threat to growth is in fact offshore, with mounting evidence that global growth is slowing (particularly in export powerhouses such as China and Germany), which is an unhelpful backdrop for already-wobbly equity and credit markets. New Zealand is a small, open economy reliant on foreign capital, and what happens offshore can have a big impact."

Full release here.

STOCKS

We were a little cautious yesterday, but Equities continue to be bullish. Now, only the Shanghai remains a bit of a concern in the medium term.

Solid rally in the Dow (25366.43, +617.70, +2.50%), as the market interpreted Powell's speech yesterday (see Interest Rates below) as dovish on balance. The Dow showed muscle and rose well past 25000. It can well target 25750 now.

Earlier in the day, the DAX (11298.88, -0.09%) opened higher near 11355 but gave back the gains to close marginally lower. Perhaps it needs to spend some "sideways time" between 11200-400 before it fulfills its longer term bullish potential for 11600+.

As mentioned once earlier, the Nikkei (22350, +0.73% over yesterday's close of 22177) resembles the Dow Jones chart and is potentially bullish in the longer term, but needs to break above 22500 to confirm.

Although the Shanghai (2601, +27.06, +1.05%) managed a respectable rally rally yesterday after days of losses coming down from 2700, and can also move up to 2650-75 in the near term, its longer term trend remains bearish while below 2675.

Belying our caution, the Nifty (10728.85, +43.25, +0.40%) moved up yesterday. It is quoting higher near 10825 on the SGX today and may test Resistance at 11000 in the next few days. The Sensex (35716.95, +0.57%) too rose past 35500 and may now move up to test 36350.

COMMODITIES

Crude prices started falling yesterday after the EIA reported an addition to the crude oil inventories for the week ended 23rd Nov by 3.6mln barrels.

Brent (58.88) and WTI (50.59) have dipped from levels seen yesterday. The fall in crude prices does not seem to have ended yet. Brent has room on the downside towards 58-56 while WTI can test 47.50 in the near term.

Brent –WTI spread (8.29) has come off from levels near 8.5 and could now be headed towards 7 while the crude prices fall.

Gold (1229.10) has risen sharply to re-test 1230 on the upside. A break above 1230 is needed to take the price higher towards 1240/50 in the near term. We could soon see a break above 1230 as the movement in the 1210-1230 region seems to be in a contraction mode.

Silver (14.43) has also moved up and if the rise continues to take the price above 14.50, it could head towards upper resistance near 15.

Copper (2.7980) has moved up from 2.70 in spite of having some more room on the downside towards 2.65. A rise back towards 2.85 looks possible in the next 2-3 sessions.

FOREX

Watch immediate resistances near 1.14 and 1.285 and higher resistances near 1.15 and 1.295 on Euro and Pound respectively. USDINR could meanwhile test 70.30/20 on the downside.

Dollar Index (96.79) could fall more towards support on daily candles at 96.50 by early next week. If it breaks below 96.50 as well, then it could move further down towards lower support on daily line chart at 96.

Euro (1.1374) broke above 1.135 yesterday and now faces resistance at 1.14 on daily candles. If it breaks above 1.14, it could move further up towards higher resistance at 1.15 on weekly candles in the next couple of weeks.

Dollar Yen (113.42) tested resistance near 114.04 on daily candles yesterday and has now come off from there. It could now move lower towards 113 early next week (113 is seen as support on daily candles).

Pound (1.2831) has immediate resistance at 1.285 on daily candles. If it breaks above this level, it could then move up till higher resistance near 1.295 on 3 day candles. It would be crucial to see whether it closes below 1.280-281 today - a close below that level would be a bearish indicator for the near term.

Aussie (0.7298) tested resistance at 0.7328 on daily candles yesterday and is now dipping from there. It could possibly fall a bit more early next week towards support near 0.723-0.725 on daily candles and then again rise from there.

Euro-Yen (128.97) broke above immediate resistance at 128.75 on daily candles yesterday. The 21 weeks MA at 129.32 could possibly provide some resistance and it would be important to see where it closes today with respect to the 21 weeks MA. If Dollar Yen falls towards 113 and Euro breaks past 1.14 to target 1.15 in the next week, we could then see Euro Yen targeting levels near 130.

Dollar Rupee (70.625; current offshore NDF: 70.40) could test 70.30/20 on the downside while upside could be capped at 71.00/10 in the next few sessions.

INTEREST RATES

Powell said that rates are just below neutral, that the policy path is not pre-fixed and that the Fed is data sensitive. This was interpreted as dovish, on balance, by the markets.

Funnily, though, the US 2Yr (2.81%) is still trading above crucial Support at 2.80%. Likewise, the US 10Yr (3.06%) is also not breaking below crucial Support in the 3.05-3.00% region immediately. Importantly, the 10-2 Spread moved up to 25bp from 22bp earlier. The BIG thing would be a rise above 28-30bp, if seen at all.

But, if stocks can rise and Crude can fall even as the US 2Yr remains above 2.80%, why should we cavil?

The 10Yr GOI (7.6438%) yesterday, in line with our preference for a dip to 7.70-7.65-7.60%. It can dip some more as well, but we would have to be cautious about Support in the 7.60-55% region holding up in the near term.

Bank of Japan board member Takako Masai said price growth remained weak in Japan even though growth was solid. And, "as such, the best approach would be to sustain the current ultra-loose monetary policy. With that "the positive momentum is not disrupted," regarding inflation moving back to 2% target.

She also noted that "Monetary easing can stimulate the economy. On the other hand, prolonged low rates could have adverse effects on bond market functions and financial institutions' profits". Thus, "in guiding monetary policy, the BOJ must thoroughly scrutinize the costs and benefits of its policy from various perspectives."

On BoJ's move to allow 10-year JGB yield to move from -0.1% to 0.1%, she that "Such flexible measures the BOJ took will help sustain sound market functions."

US stocks were shot up overnight after the surprised comments from Fed Chair Jerome Powell that interest rates are "just below" neutral. Markets took that as a sign Fed is nearing to a pause in the currency rate hike cycle.

DOW rose 617.70 pts or 2.50% to 25366.43. S&P 500 gained 61.62 pts or 2.30% to 2743.79. NASDAQ added 208.89 pts or 2.95% to 7291.59.

Treasury yields were mixed though. Five-year yield closed down -0.029 at 2.856. 10-year yield dropped -0.011 to 3.044. But 30-year yield rose 0.010 to 3.329.

The strong rally in DOW was rather decisive technically. 23997.21 structural support was defended again. And the range for medium term consolidation is likely set for now, that is, between 23997.21 and 26961.81. For the near term, 55 day EMA will likely be taken out as the current rebound extends. DOW could head to 26000/27000 region but we don't expect expect a break of 26951.81 any time soon.

Key Highlights

• The New Zealand Dollar traded towards 0.6880 and later corrected lower against the US Dollar.
• Earlier, there was a break below a key bullish trend line with support at 0.6810 on the 4-hours chart of NZD/USD.
• The US GDP in Q3 2018 (Prelim) grew 3.5%, similar to the market forecast.
• Today in the US, the FOMC Meeting Minutes will be released, which could impact the market sentiment.

NZDUSD Technical Analysis

The New Zealand Dollar remained in a decent uptrend and traded above the 0.6750 and 0.6800 resistances. However, the NZD/USD pair faced sellers near 0.6880 and later started a downside correction.

Looking at the 4-hours chart, the pair formed a high at 0.6883 and later declined below the 0.6850 support level. During the slide, there was a break below the 50% Fib retracement level of the last wave from the 0.6705 low 0.6883 high.

Moreover, there was a break below a key bullish trend line with support at 0.6810 on the same chart. The pair declined below 0.6800 and tested the 0.6750 support along with the 100 simple moving average (red, 4-hours).

There was no proper test of the 76.4% Fib retracement level of the last wave from the 0.6705 low 0.6883 high. The pair bounced back sharply and revisited the 0.6880 resistance.

On the downside, the key supports are at 0.6840 and 0.6810, which were resistances earlier. As long as the pair is above 0.6810, it could bounce back in the near term. On the upside, an initial resistance is at 0.6880, above which the pair must surpass 0.6900 to revisit the 0.6920 and 0.6950 levels.

Fundamentally, the US Gross Domestic Product Annualized reading for Q3 2018 (Prelim) was released by the US Bureau of Economic Analysis. The market was looking for a growth of around 3.5% in Q3 2018.

The result was in line with the forecast as the USD GDP grew 3.5% in Q3 2018, according to the “second” estimate. The report added that:

Real gross domestic income (GDI) increased 4.0 percent in the third quarter, compared with an increase of 0.9 percent (revised) in the second quarter. The average of real GDP, increased 3.8 percent in the third quarter, compared with an increase of 2.5 percent (revised) in the second quarter.

Overall, it seems like pairs like EUR/USD, GBP/USD, AUD/USD and NZD/USD may perhaps struggle to gain traction in the short term.

Economic Releases to Watch Today

• German Consumer Price Index for Nov 2018 (YoY) (Prelim) – Forecast +2.4%, versus +2.5% previous.
• Euro Zone Economic Sentiment Indicator Nov 2018 – Forecast 109.0, versus 109.8 previous.
• FOMC Meeting Minutes.
• US Initial Jobless Claims – Forecast 220K, versus 224K previous.
• US Personal Income for Oct 2018 (MoM) – Forecast +0.4%, versus +0.2% previous.
• US Pending Home Sales for Oct 2018 (MoM) – Forecast +0.5%, versus +0.5% previous

Wall Street soars after Powell’s speech

In a speech yesterday, Fed Chairman Jerome Powell hinted that rates could be “just below” what is perceived as a neutral level. The market interpreted this as meaning fewer rate hikes next year, and equities surged while the US dollar fell as a result.

US30USD Daily Chart

The US30 index rallied to its highest level in nine days after Powell’s speech, adding the most in one day since October 16

The index is rising toward the convergence of the 55- and 100-day moving averages in the 25,594-25,605 area

US personal income is expected to rise 0.4% m/m in October after a 0.2% gain in September. Spending is seen unchanged at +0.4% m/m. Spending needs to pick up to give any boost to the economy.

DE30EUR Daily Chart

The Germany30 index edged higher in yesterday’s trading as investors bid up equities amid hopes for a dovish Powell speech. Sure enough, they got one, so the index should rise again today

The 55-day moving average is at 11,697 and has capped prices on a closing basis since August 29

Consumer prices in Germany are expected to rise at a slower pace of 2.4% y/y in November, data today should show. Slower price increases could help the ECB maintain rates lower for longer and help stocks.

XAU/USD Daily Chart

Gold advanced for the first time in four days yesterday as the US dollar fell after Powell’s speech

The commodity bounced off the 100-day moving average at 1,212 for a second straight day. Recall the 55-day moving average crossed above the 100-day moving average on Monday, a medium-term bullish indicator. Trendline resistance may be found near 1,227

The release of minutes of the last FOMC meeting early tomorrow Singapore time could disclose whether tapering of rate hikes was discussed. We may get a glimpse of what the Fed thinks the rate horizon will look like in 2019.

A dovish pivot

The market sensitivity to Fedspeak was on full display overnight when Jay Powell comments at the Economic Club of New York were latched as overtly dovish

POWELL: NO PRESET POLICY PATH, RATES `JUST BELOW' NEUTRAL RANGE

Suggesting that a pause in the rate hike cycle is a lot closer than what's currently priced into the curve. In other words, the markets are reducing the probability of 2019 hawkish quarterly US interest rate rises.

Traders are interpreting this as a departure from FOMC statement where the market thought Powell suggested the Fed was prepared to move into restrictive territory if data supported. And the price action has been very predictable, US Treasuries and US equities are acutely higher while the USD is being sold across the board.

A significant reversal of fortune on the EUR which was one of the more popular shorts in the market while the high beta G-10's risk-correlated currencies like the Aussie and Kiwi are soaring.

The prospect of a Fed pause was just what the equity market doctor ordered and boosting investor sentiment. Powell's dovish pivot reduces nagging concerns about vigorous interest rate hikes while providing the market with one of the best holiday gifts, a significant bounce in global equity markets.

Oil markets, headline roulette

Despite improving risk sentiment on softer Fed rate path along with Powel de-emphasising financial stability risk sentiment, Oil market continues to struggle after what could best be described as a half-hearted attempt to rally overnight. Indeed, the market does have that WTI Sub $50's feel about it on the back of the 10th straight weekly rise in U.S. crude inventories despite what OPEC and their allies ultimately decide on the production cut front. But, is it: United we stand, divided we fall.” when it comes to OPEC and OPEC +

All eyes are on the upcoming G-20, where it's likely a rebalancing agreement gets put in place relegating OPEC/OPEC + producer meeting in Vienna to little more than a rubber stamp formality

Beware of the headline roulette wheel as we should expect a flurry of headlines in typical OPEC fashion. And not to mention the breadth of opinion and the lack of consensus on the direction of oil prices should ensure volatility remains high for some time. So, buckle in this could be an intense roller coaster ride over the next few weeks

On the recent Blomberg survey, Thirty-one of 36 analysts and traders in a global poll predicted that the coalition of producers known as OPEC+, led by Saudi Arabia and Russia, will announce output curbs when it gathers on Dec. 6 to 7. The average estimate for the size of the cut was 1.1 million bpd.

I won't mention who one of those five lone wolves were, but then again, I always price in the most significant tail (oops I just did)

Gold Markets

A surprisingly softer Fed and the predictably weaker dollar triggered a substantial rally in the precious space as both Gold and Silver pushed higher but holding back further topside ambition is the fact Equities are enjoying this move.

Currency Markets

Fairly sustained dollar dump as the EURUSD is trading near the highs of the day, (at time of writing) But the big movers and I mean eye-catching movers are the NZD and AUD on beta risk correlation. But keep in mind short Aussie was a well-subscribed proxy trade to express negative trade war is. So, I think a double whammy effect with a de-escalation of trade war risk coupled with dovish Fed pivot may have contributed to the outsized move.

Malaysia

Oil prices continue to weigh negatively however given the softer Fed tone; we should see the MYR bond markets play catch-up to regional peers as Asian bonds (such as THB, IDR, INR) have rallied for the past month. However, MYR bonds have lagged with the Ringgit continue to struggle. However, we should see a decent investor demand into the 5 Year MGS auction which could trigger an unexpected rally on the Ringgit.

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