· The dollar traded narrowly as markets braced for a rate cut by the Federal Reserve later on Wednesday, while sterling steadied after Britain’s lower house of parliament approved calling an early election in December that might break the Brexit deadlock.
The dollar was steady against the euro at $1.1110 and flat versus a basket of six major currencies at 97.698 as investors awaited the Fed’s interest rate decision.
Against the yen, the greenback was also little moved at 108.84 yen, not far from its three-month high of 109.07 yen touched on Tuesday.
· The U.S. central bank is expected to cut its policy rate for a third time in a row when it concludes its two-day meeting on Wednesday.
After lowering interest rates in July and September, the central bank was expected to cut again by 25 basis points, taking the fed funds rate to 1.50%-1.75%, a Reuters poll of economists found. Another cut is forecast for early next year, taking the rate to 1.25%-1.50%, with no more changes expected for the rest of 2020.
Investors are watching for any indication that further cuts are likely, with futures pricing suggesting more easing is expected in 2020. If that is not foreshadowed, traders expect the dollar to rise.
Sterling last stood at $1.2865.
· Elsewhere, Chinese yuan inched up marginally as investors awaited the outcome of the Fed meeting and more clarity on how China-U.S. trade negotiations are going.
In the spot market, onshore spot yuan was last changing hands at 7.0650, 25 pips firmer than the previous late session close.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at a two-month high of 7.0582 per dollar, 35 pips firmer than Tuesday’s fix.
· Deutsche Bank analysts suggest that for the Fed, a 25bp cut is all but priced in but the bigger focal point for markets is what message the Fed wants to send.
Key Quotes
“With incoming data since the September FOMC meeting generally underperforming expectations, revisions to the statement language about recent developments should skew in a slightly dovish direction. In terms of forward guidance, the statement should retain the Committee's commitment to "act as appropriate to sustain the expansion". Ultimately the team believe that it is too early for the FOMC to communicate the end of the cutting cycle given where risks lie, the recent data and the leading indicators signaling a further slowdown ahead.”
“One point they do make though is that the Chair could implicitly raise the bar for further cuts as they await the outcome of a few event risks related to trade policy and take time to assess incoming data. In effect, the threshold for cutting could change from not seeing an improvement in the data – which is how we interpreted the guidance from the past several meetings – to needing to see some further deterioration.”
· When Federal Reserve officials conclude their two-day policy meeting on Wednesday, they may at last have succeeded in divorcing the actions they take in managing the U.S. central bank’s massive balance sheet from interest rate decisions.
· The U.S. economy likely slowed further in the third quarter, held back by a moderation in consumer spending and declining business investment, which could spur the Federal Reserve to cut interest rates again to keep the expansion on course.
Gross domestic product probably increased at a 1.6% annualized rate in the third quarter, also because of a smaller inventory build, according to a Reuters survey of economists, after rising at a 2.0% pace in the April-June period.
· Economic forecasts
For the U.S., respondents now see a 34% chance of recession in the next year, the highest since 2011, amid elevated concerns over protectionist trade policies and global economic weakness. While recession is not the base case, respondents forecast economic growth at just 1.75% this year, down from 2.9% in 2018, and then rebounding to 2% in the next two years. Respondents expect the unemployment rate to tick up above 4% by 2021.
· U.S. President Donald Trump’s demand that Beijing commit to big purchases of American farm products has become a major sticking point in talks to end the Sino-U.S. trade war, according to several people briefed on the negotiations.
Trump has said publicly that China could buy as much as $50 billion of U.S. farm products, more than double the annual amount it did the year before the trade war started.
U.S. officials continue to push for that in talks, while Beijing is balking at committing to a large figure and a specific time frame. Chinese buyers would like the discretion to buy based on market conditions.
If U.S. agricultural products “enter China in a concentrated way, it might be hard for the domestic market to digest,” the Chinese official added.
Oversupply of agricultural products in China would hit local prices really hard, he said, “and break the supply-demand balance.”
· China’s UN envoy has sounded a warning note over trade talks with Washington after the US joined 22 other countries at the UN in criticising Beijing over the detention of ethnic Uighurs and other Muslims.
China has been widely condemned for setting up internment camps in the western region of Xinjiang that it describes as “vocational training centres” to stamp out extremism and give people new skills. The United Nations says at least a million Uighurs and other Muslims have been detained.
· With a new U.K. election cycle about to begin, some voter polls and British bookmakers are already suggesting that the ruling Conservative Party will win a clear majority in Parliament.
· Japan’s consumption is unlikely to be hit as hard by October’s sales tax hike as by one in 2014, partly due to government efforts to soften the blow, an official at rating agency Moody’s Investors Service said on Wednesday.
The relatively small magnitude of the hike is another reason the hit to spending shouldn’t be as big as felt in 2014, said Christian de Guzman, a senior vice president of sovereign ratings at Moody’s.
Japan raised its national sales tax to 10% this month, the first increase since a hike to 8% from 5% in April 2014.
· The United States House of Representatives on Tuesday overwhelmingly approved legislation aimed at imposing sanctions on Turkish military and government officials over Ankara's military operation against Kurdish forces in northeast Syria.
The 403-16 vote is the latest rebuke of Trump's decision to withdraw US forces from northeast Syria and leave Kurdish allies without military support as Turkey launched an operation in the area.
· Oil prices fell on Wednesday as a possible delay in resolving the U.S.-China trade war overshadowed a drop in U.S. crude inventories.
Brent crude was down 7 cents, or 0.1%, at $61.52 a barrel by 0735 GMT, having fallen to as low as $61.32.
U.S. West Texas Intermediate (WTI) crude was down 15 cents, or 0.3%, at $55.39 a barrel after reaching a low of $55.16.
U.S. crude inventories fell 708,000 barrels in the week ended Oct. 25 to 436 million, compared with analysts’ expectations for an increase of 494,000 barrels, according to data from the industry group, the American Petroleum Institute.
Reference: Reuters, CNBC
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