Americas TP news wrap 22 Sep:Stocks tumble, bond yields soar, USD steady this wk

  • Forex news for North American trading on Sep 22, 2023
  • The New Zealand Dollar (NZD) and the Australian Dollar (AUD) are wrapping up the day with the most robust performance among major currencies, while the Japanese Yen (JPY) has displayed relative weakness. The most recent central bank announcement occurred prior to the opening of the U.S. markets, as the Bank of Japan decided to keep interest rates unchanged. However, they did express their intention to contemplate an easing of monetary policy once they achieve a 2% inflation target and emphasized that the sustainability of wage increases holds paramount importance in shaping the inflation outlook.

The strongest to weakest of the major currencies

At the close of the day, the performance of the U.S. Dollar (USD) was a mixed bag, posting gains against the Japanese Yen (JPY) (+0.55%) and the British Pound (GBP) (+0.45%), as well as against the Swiss Franc (CHF) and the Euro (EUR). However, it experienced losses against the New Zealand Dollar (NZD) (-0.49%) and the Australian Dollar (AUD) (-0.41%). The USD remained relatively stable in its exchange with the Canadian Dollar (CAD).

At the end of the trading week, the dollar index showed a slight increase of +0.27%. It’s worth noting that the DXY is a currency index with significant weightings assigned to key currencies, primarily the Euro (EUR) at 57.6%, followed by the Japanese Yen (JPY) at 13.6%, and the British Pound (GBP) at 11.9%.

Looking at the major indices versus the US dollar, the green was mixed.

The USD was stronger vs the:

  • EUR, +0.16%
  • JPY, +0.38%
  • GBP, +1.15%
  • CHF, +1.07%

The USD was weaker vs. the:

  • CAD, -0.33%
  • AUD, -0.21%
  • NZD, -1.08%

Versus the offshore yuan, the USD rose 0.27% this week.

This week, the Federal Reserve chose to maintain interest rates at 5.5%. However, they retained their expectations of implementing further tightening measures in 2023 and raised the anticipated year-end rate for 2024 to 5.1%, a notable increase from the 4.6% projected back in June.

Meanwhile, across the pond in the United Kingdom, the Bank of England entered the week with market expectations leaning toward a 25 basis point rate hike. Nevertheless, following lower-than-anticipated inflation data released midweek, the likelihood of a rate hike dwindled to a 50/50 probability. Ultimately, the Bank of England opted to keep rates unchanged, with a narrow 5-4 vote margin. This decision contributed to a depreciation of the pound against the US dollar during the week.

Similarly, the Swiss National Bank was also anticipated to raise rates by 25 basis points at their quarterly meeting. However, they ultimately decided to keep rates unchanged, resulting in a weakening of the Swiss currency against the US dollar over the course of the week.

In the US debt market this week, yields continued their upward trajectory for the third consecutive week, reflecting the market’s anticipation of a “higher for longer” scenario concerning the Fed funds target rate:

  • 2-year yield rose 7.5 basis points to 5.112%
  • 5-year yield rose 10.2 basis points to 4.569%
  • 10-year yield rose 10.4 basis points to 4.438%
  • 30-year yield rose 11.1 basis points to 4.529%

While the longer-term interest rates experienced the most significant increase this week, the 2-10-year yield spread continues to linger at -67 basis points, a persistent signal of a potential recession on the horizon. This spread has been in negative territory since July 2022 and hit a low of -109 basis points in July 2023. The question now is whether it will ever turn positive. If the Federal Reserve maintains a “higher for longer” approach, it logically implies that the longer-term rates should rise. However, a challenge arises with mortgage rates already climbing to 7.40%. If the 10-year yield increases by another 67 basis points, mortgage rates could surpass 8%, potentially pushing the US economy into a recession. In such a scenario, the Fed might be compelled to ease its short-term rates.

It seems that a recession is the only foreseeable solution to the persistently negative yield curve.

In the US stock market this week, both the S&P and NASDAQ indices faced their most challenging week since March, with the NASDAQ index plummeting by 3.62% and the S&P declining by -2.93%.

Crude oil prices closed the week down by -0.54%, equivalent to a $-0.48 drop, after reaching their highest level since November 2022 at $92.43.

Spot gold saw a modest rise of $1.37 or 0.07%, essentially remaining unchanged, while silver experienced a more substantial increase of $0.52 or 2.276%.

Several significant unresolved stories are still unfolding, including: [insert list of relevant stories here].

  • The auto workers’ strike
  • The potential for a government shutdown at the end of the month

All of these issues will eventually find resolution. The key lies in determining the timing and the associated consequences. From an economic standpoint, the US Personal Consumption Expenditures (PCE) data is scheduled for release next Friday, with expectations of a 0.2% increase in core PCE.

Adam will return next week, and I want to express my gratitude for your support and patience throughout this week. Wishing you a fantastic weekend!

Let’s cheer for the Ducks as they take on the Buffs.

Go Tigers, and may they triumph over the Seminoles!

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