The main take away from the last 24h, even if sadly not translated on a pick up in currency volatility, is the notion that the Fed may be preparing the market for a potential shift in policy. That’s the only sensible conclusion if one listens to what Fed’s Vice Chair Clarida, the most important voice at the helm of the Fed after Chair Powell, had to say. The policymaker opened the door for the Fed turning more accommodative if certain pre-conditions are met, which on its own, is a strong statement of intentions. The fixed income market was again a sea of healthy buy-side volatility (lower yields), translated in the recovery of the Yen from the lowest levels it’s traded this week. The USD, surprisingly, was rather unperturbed by the dovish remarks from Clarida, and with month-end FX hedge rebalancing skewed towards moderate to strong USD buying due to the underperformance in US equities as the trade war escalates, the price action in the EUR/USD is already acting as a precursor of the combatant stance by the DXY into Friday. Interestingly, even as Crude Oil keeps selling off, the Canadian Dollar has followed in locksteps the USD as the currency managed to navigate quite successfully the BOC test after the Central Bank sounded quite neutral, which by default should be interpreted as rather positive in a world of dovish Central Banks. Along these lines, the next one set to bite the bullet, especially after the latest Capex reading, is the RBA, an outcome the market has fully priced. The Aussie is still putting in a fight. With regards to the European currencies, the Euro enjoyed firmer pockets of demand, while the Sterling is still on selling mode as Germany mulls a veto on extending the Brexit process beyond October.
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