Not so fast! Despite the buildup for another round of hawkish remarks from Yellen, the Fed head honcho hit the pause button on the dollar’s rally in admitting that the central bank may have been too optimistic.
Meanwhile, Kiwi weakness remained in play while traders priced in the possibility of a downbeat RBNZ announcement. On the flip side, the Loonie got a boost from the Canadian Finance Minister’s speech.
- U.S. S&P/CS Composite-20 HPI rose from 5.6% to 5.8% y/y
- U.S. CB consumer confidence index dipped from 120.4 to 119.8 in Sept
- U.S. new home sales fell from 580K to 560K vs. 585K forecast
- FOMC member Bostic expects inflation to pick up, open to a December hike
- Bostic: Gradual approach to tightening still appropriate
- FOMC member Brainard focused on income and wealth inequality
- Fed head Yellen: Downside pressure on inflation could prove to be persistent
- Yellen: Policymakers may have misjudged the strength of the labor market
- Yellen: FOMC may also have overestimated fundamental forces driving inflation
- Yellen: “It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.”
- Canadian FM Morneau: High interest rates expected given economic performance
- Morneau: Economy can continue to do well even with CAD at these levels
Yellen turns hawkishness down a notch
All eyes and ears were on Fed Chairperson Yellen as traders sought to get more tightening clues. Instead, she let dollar bulls second-guess themselves and doubt the Fed’s economic outlook.
Remember how the FOMC has been positive that the tight labor market would keep upside pressure on wages and boost overall inflation down the line? Well, Yellen admitted that policymakers may have been a wee bit optimistic with their estimates for employment and inflation, citing:
“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation.”
This builds on her remarks during this month’s FOMC statement wherein she noted that committee members found the recent dip in inflation puzzling. Yellen went on to say that the downside risks to inflation could prove to be persistent and that there’s a chance it won’t stabilize at 2% in the next few years.
However, she also clarified that it wouldn’t make sense to keep monetary policy unchanged until inflation reaches the actual 2% target, adding that the FOMC should also be careful about moving too slowly. Yellen explained that there are also risks of the economy overheating without modest hikes over time.I’ve got mixed feelings about this one as the Fed head seems to be undermining the central bank’s ability to stay on top of things, but her remarks weren’t exactly downbeat enough to chuck December hike expectations out the window. Oh, Yellen can be such a tease!
Meanwhile, FOMC member Brainard, who usually has a cautious comment or ten up her sleeve, refrained from talking about her monetary policy bias in her speech. FOMC member Bostic a.k.a. the new guy said that he expects inflation to pick up and that he’s comfortable with the idea of a December hike.
Optimistic remarks from Canadian FM
The mood was a bit more cheery in the Great White North, especially after Canadian Finance Minister Bill Morneau assured that the economy could continue to do well even with the Loonie’s current exchange rate levels and higher interest rates.
Morneau explained that the currency’s strength is a reflection of the economy’s strong performance and even with the BOC’s recent hikes, interest rates remain at historically low levels.
Risk appetite still shaky
North Korea and the Donald seem to have paused from hurling harsh words at each other for the time being, allowing U.S. equity indices to score a few gains from the tech sector bounce.
- S&P 500 index is up 0.18 points to 2,496.84 (+0.01%)
- Nasdaq is up 9.57 points to 6,380.16 (+0.15%)
- Dow 30 index is down 11.77 points to 22,284.32 (-0.05%)
Gold has also retreated from its previous surge as traders might have eased up on their risk-off holdings, but crude oil is also in the red.
- Gold is down to $1,296.40 per troy ounce (-1.15%)
- Silver is down to $16.846 per troy ounce (-1.76%)
- WTI crude oil is down to $52.09 per barrel (-0.25%)
- Brent crude oil is flat at $58.06 per barrel (0.00%)
Major Market Mover(s):
The Kiwi chalked up another day in the red against most of its rivals as expectations for a downbeat RBNZ decision loomed.
NZD/USD dropped from .7274 to .7202 (-0.96%), NZD/CHF slipped 44 pips to .6977 (-0.60%), NZD/JPY is down to 80.83 (-0.38%), and GBP/NZD is up to 1.8675 (+0.78%)
Even with the dip in crude oil, the positively-correlated Loonie managed to hold its ground and pocket a few pips during Canadian FM Morneau’s speech.
AUD/CAD tumbled 79 pips to .9737 (-0.81%), NZD/CAD dropped to .8893 (-1.01%), EUR/CAD is down to 1.4559 (-0.65%), and CAD/JPY is up 56 pips to 90.86 (+0.62%)
The scrilla may have paused from its climb then tossed and turned during Yellen’s testimony, but it still managed to end the day with small gains against most of its counterparts.
USD/CHF dipped to a low of .9653 then recovered to .9690 (+0.26%), AUD/USD is down to .7882 (-0.81%), EUR/USD fell to 1.1785 (-0.51%), USD/JPY moved back up to 112.25 (+0.49%)