As follows from the minutes of the last FOMC meeting published on Wednesday , the US Federal Reserve is taking a pause in the interest rate reduction cycle. J. Powell previously explained that the plan for the next reduction in rates would require a "substantial reassessment of the Committee's prospects," that is, the Fed will consider ways to reduce rates again when new signs of a slowdown in the US economy appear or problems begin in the currency markets.
In general, the Fed's position is explained by the attempt to play the most optimal way ever narrowing, like shagreen leather, a set of tools to support the economy. The rate reduction cycle has not been stopped, but only a pause has been taken in order to increase bank reserves to a certain level so that a liquidity buffer can be created. After that, the Fed's balance sheet growth will cease, and the Committee, declaring the intermediate goal achieved, will begin to reduce the rate again
On the other hand, CME's futures show the confidence of the market that there will be no rate cuts in December and January, although there are disagreements regarding March. By this time, the Fed may announce the completion of the program for the purchase of bills, which means that there will be a need for another incentive instrument.
Despite assurances that the Committee defines the state of the US economy as good, nothing has essentially changed. Concerns about business investment remain, a further decrease in ISM and wage growth is forecasted, and inflation expectations do not grow and are close to historical lows. Thus, the risks of correction in the stock and debt markets increased significantly, and stock indices went down after the publication of the minutes, pulling Asian and European indices along on Thursday morning.
At the same time, the central banks of the G10 countries will react to a change in the position of the Fed one way or another, and this reaction will generally determine the dynamics of other currencies relative to the dollar. Cheap liquidity is the only factor that supports the growth of the global economy. As soon as the Central Banks make an attempt to stop the supply of cheap liquidity, global trade immediately declines, investment in business is reduced, as well as the business activity.
This can be clearly seen if we compare the dynamics of the aggregate balance of the three largest Central Banks (ECB, Bank of Japan and the Federal Reserve) with economic activity. Since the crisis of 2008, the total balance of the three Central banks has been growing continuously, and in 2018, an attempt was made to reduce it.
The global economy responded immediately with a decline in trade, a decline in PMIs and the threat of a new recession.
As soon as the Fed and the ECB resumed the asset buyback program, US stock indices reached new highs.
The Fed is obviously trying to control the mood of the investors. Minutes, in all possibility, will increase the probability of a stock index reversal. Therefore, growth in demand for protective assets and oil correction should be expected.
NZD/USD
Kiwi currency is stubbornly trying to resume growth after the RBNZ, contrary to the expectations of the market, it did not begin to reduce the rate at the next meeting. Now, here are the internal factors in favor of growth - the PMI index in the services sector grew slightly in October, producer prices rose better than expected, while the dairy price index also rose stronger than expected.
The technical picture has not changed as the Kiwi is targeting at growth. The nearest targets are 0.6435 and 0.6465, then the channel border is 0.6515 / 25.
AUD/USD
The threat of recession for the Australian economy is gradually increasing. In contrast, the retail sales for the third quarter decreased, spending on consumption is also weak, and households use tax benefits not to increase purchases, but to pay off previous debts. Moreover, investments in housing and business are declining.
The forecasts are negative - according to NAB calculations, inflation will not be able to rise to 2% until the end of 2021, and the pause that the RBA took at the rate will end in February.
The conclusion of the trade negotiations between the United States and China is likely to be delayed until next year. Australia has no internal criteria for increasing exports; demand for Australian currency will decline. Now, Aussi is trading in a narrow range of 0.6769-0.6833, from which exit is unlikely during the next day due to lack of direction. Nevertheless, a movement to 0.67 looks much more likely in the medium term.
