Fed talk confuses market

The USD was put under pressure as the previous mega hawk William Poole turned dovish, but comments from Fed’s Moscow brought the slide to a halt. The dollar eased after Poole said ‘If we came to the conclusion that the economy was really running in the direction that the bond market is currently predicting, then it seems to me that considering rate cuts is going to be highly appropriate’.

There are two reasons why Poole’s comments are unlikely to lead to a USD turnaround. First, the Beige Book suggested that consumer spending firmed in September and that the labour market has remained ‘taut’ and secondly,

FED’s Moscow opposed Poole comments by saying ‘the risk of inflation remaining too high is greater than the risk of growth being too low. Thus, some additional firming of policy may yet be necessary’.

The August trade deficit hit a new monthly record at USD69.9 bln. Markets were looking for a $66.7 bln reading. The market, however, did not even react to the data. Excluding petroleum, the deficit was fairly steady at USD42.7 bln versus USD42.3 bln in July. The deterioration hence came largely from the oil side. On the one hand, the rise in the petroleum deficit was due to a rise in oil volumes

in a sense signalling that growth is slowing but yet relatively healthy. On the other hand, with oil prices having come off further since August, this is probably telling the market that the deficit could improve. All in all, the numbers and the lack of reaction from the market just shows that investors are not concerned over the structural issues and that yield play remains the name of the game. With the US yield curve hardly unchanged and the market obsessed with a US soft landing, the market remains happy to be hold USDs.

We see the USD remaining under selling pressure with a good possibility to see a test of $1.2650 on EUR/USD. 1.8680 on GBP/USD, and CHF 1.2620 on USD/CHF as well as JPY 118.50 on USD/JPY.