Dollar Remains Under Pressure Post-Fed, though the Yen Stabilizes

The US dollar has lost another 0.5%
against most of the major currencies today, as Asia and Europe respond to the
Fed’s decision.
  There are few exceptions to this
generalization.  The Norwegian krone has gained nearly three times as
much, with the help of its central bank, which has played down for lower rates
at today’s meeting.  The euro is at its lowest level against Nokkie since the end of last year.  
Another notable
exception is the Japanese yen.
  It appears to be stabilizing at
lower levels.  The dollar had seen a high yesterday near JPY102.80 and a low in Asia today just above JPY100.  It
is recovering in the European morning and is approaching JPY101.  
The New Zealand
dollar is a third exception.
  The currency has seen some
profit-taking after the RBNZ also left rates on hold, but signaled its easing
cycle is not complete.   
The Federal
Reserve’s decision to stand pat was the most complicated in years.
  The case for a hike had
strengthened, Yellen said, but still the consensus to hike was not there.
 Three regional Fed presidents dissented, the most in a couple of years.
 In the dot plots, three (of 17) did not see a hike this year.  Many
suspect that at two of those came from Governors Brainard and Tarullo.
 The idea is that they may have dissented to a rate hike, and at the end
of the day, Yellen chose to keep the Board of Governors united.   
statement reintroduced a risk assessment that it had removed in January.
is also seen by many as a necessary precursor to a hike.   Yellen
herself indicated the Fed was prepared to raise rates this year provided the
labor market continued to improve, and no
new risks emerged.   Some apparently think this guidance could translate
into a November hike.  We are skeptical.  There is simply no
precedent for a hike so close (one week
before) to a national election.   Bloomberg’s calculation puts the odds of
a November hike as high as 21.4%.  The CME assessment, who’s methodology
we tend to share, puts the odds at 12.4%.  
There were two
other important housekeeping duties the Fed appears to have completed at
yesterday’s meeting.
  First, it has taken another step in
the process begun earlier this year of lowering the long-term Fed funds
equilibrium rate.  It now stands at 2.9%, down from 3% in June and 4% a
year ago.  Second, it reduced what it sees as the long-term growth
potential to 1.8% from 2%.   There is some risk that the long-term potential growth is revised lower again, as the
weakness in productivity growth acts as a drag.   
Yellen defended
the Fed’s action several times against reporters who pressed Trump’s argument
that the Fed’s reluctance to raise rates is a reflection of their support for
  We suspect that to the contrary as rate hike would have been
seen as a “seal of good housekeeping.”
 A rate hike would have said that under the economy is sufficiently strong to allow for a continued normalization
of policy. We also argue that other such banks, who are still in an easing
mode, would have welcomed a Fed hike.  
Speaking of
politics, Nate Silver’s election
tracker sees the US presidential race the closest in the cycle. 
 The polls alone have it 57.6% to 42.4%, and when
combined with history and economic trends, Sliver puts the race at 57.1% to
42.9%.   The first debate is September 26.
The one
currency that many observers linked to Trump’s success in the polls was the
Mexican peso, which had fallen to record lows. 
 A combination of the rally in oil prices (helped by a large drawdown
in US inventories), the rally in stocks, and the Fed standing pat) is lending
support to the peso, despite the tightening in the US presidential contest.
 Yesterday the peso snapped a six-day slide,
and its is extending its recovery today.  
The US reports
weekly initial jobless claims, existing home sales, leading economic indicators
and the KC Fed survey. 
 In light of the FOMC statement and
guidance, the data pose little more than headline risk.  
In terms of the
price action, the euro rallied from a little below $1.1125 yesterday to nearly
$1.1250 today before running out of steam.
completed a retracement objective of the decline from the month’s high
on September 8 near $1.1325.  The intraday technicals allow for some
slippage in the North American session.  Initial support is seen near $1.1200, and a close below $1.1180
would suggest a period of consolidation.  
Sterling, which
has spent part of the past four sessions below $1.30 is now back above this
  It appears to have met some news sellers in the $1.3080
area.   Intraday technical indicators also allow for a retracement toward
The dollar
appears to have stalled in front of JPY101. 
 Japanese markets were closed today and participants may be
reluctant to take a strong view without
Japanese participation.  The risk is that by steepening the yield curve and raising
long-term rates, the BOJ solves one problem (what we have called the
reproduction problem for capital–negative interest rates) opens the door to
another.  It undermining the incentives to export savings.   Given
the current account surplus, without the export of savings, the yen will be
under upward pressure. 

The Australian
and Canadian dollars are well bid.
  The Aussie appear set to retest
$0.7700, and the bulls have their sights set on this month’s high a little above
$0.7730. The US dollar had encountered steady offers near CAD1.3250 over
the past week or so. The USD bears
finally are prevailing. It has been sold through CAD1.3035 today, the 50%
retracement of the recent run-up.  The 61.8% retracement target is found near CAD1.2985. 


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