US Dollar May Recover as Fed Speeches Reiterate Rate Hike Intent

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US Dollar May Recover as Fed Speeches Reiterate Rate Hike Intent

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar fell by the most in almost 5 months after FOMC rate decision
  • Fed-speak may stoke USD recover as officials reiterate rate hike intent
  • Fiscal policy still a wildcard as Mnuchin meets with G20 counterparts

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The US Dollar suffered its largest decline in nearly five months last week as the FOMC policy announcement fell short of hawkish investors’ lofty expectations (as suspected). Officials delivered a widely anticipated interest rate hike but offered nothing to suggest steeper tightening thereafter. Projections for key economic indicators and the 2017 path for the baseline lending rate were left unchanged from December’s update.

This matched the markets’ response to the release of official jobs data a week earlier. It too proved strong enough to maintain the baseline outlook but did little to advance the case for faster stimulus withdrawal. A disappointed greenback retreated, presenting a preview of the price action to be produced by the Fed meeting’s outcome three days later.

The week ahead is thin on top-tier data flow, putting the spotlight on a packed docket of scheduled commentary from Fed officials. Comments from Chair Yellen and Neel Kashkari – the President of the central bank’s Minneapolis branch that dissented from the decision to raise rates last week – are likely to take top billing. Besides that, seven other Fed policymakers are due to speak.

As the dust settles after last week’s rate decision, the markets may be reminded that the US central bank is still on track to push rates higher by 25-50 basis points before 2017 draws to a close. That’s 25-50 basis points more than any of the Fed’s G10 counterparts, according to probabilities priced into OIS rates. A steady stream of speeches repeating as much in the coming week may offer the greenback a lifeline.

Fiscal policy remains a wildcard however. Treasury Secretary Mnuchin is making his international debut at a meeting of G20 finance ministers and central bank heads in Germany. A draft communique from the sit-down that surfaced Friday was relatively tame but the heretofore ubiquitous opposition to protectionism was absent. The final message after the meeting ends on Saturday may yet unnerve the markets.

Political Risk for Euro-Zone Dissipating, Boosting EUR/USD Prospects

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Political Risk for Euro-Zone Dissipating, Boosting EUR/USD Prospects

Fundamental Forecast for EUR/USD: Bullish

- The rise of protectionism in Europe has hit a speedbump after Geert Wilders was defeated in the Netherlands; if Marine Le Pen loses the French presidential elections, the Euro will have weathered two significant risks.

- Between the ECB’s ‘dovish decision with a hawkish twist’ and the Fed’s ‘dovish rate hike,’ it seems that a run towards parity in EUR/USD spurred by central banks is a distant possibility.

- The retail crowd continues to broadly fade Euro strength, which is a contrarian indicator for further gains.

The rally in higher yielding currencies last week relegated the Euro to one of the two worst performing currencies, although nothing Euro-negative happened, per se. The Dutch elections, which saw right-wing populist Geert Wilders woefully underperform expectations, proved to be a sigh of relief for those market participants looking at it as a litmus test for elections over the coming months (see: France).

Concurrently, with the US Federal Reserve failing to endorse a faster rate hike cycle, the selloff in the US Dollar proved to be a boon for equity markets globally, even as bond yields fell. With the biggest risks of the week proving to be, well, not risky at all, there is little surprise that risk-correlated assets did so well, leaving the Euro behind. EUR/USD gained +0.61% last week, although EUR/AUD lost -1.53%.

For EUR/USD, the gap between in ECB and Fed policies seemed to close slightly over the past two weeks. As discussed in this note last week, the ECB’s policy decision could be characterized as ‘dovish with a hawkish twist’: dovish, as the central bank kept its main interest rate deep in negative territory; but with a hawkish twist, as the Governing Council signaled the end of the emergency TLTRO measures, with a hint at starting to shape future policy statements to prepare markets for a move away from its lower bound of interest rates sometime in early-2018. On the other hand, the Fed’s decision this week was ‘hawkish with a dovish twist’: hawkish, as the Fed raised its main rate by 25-bps; but with a dovish twist, as the FOMC refused to endorse a steeper path of rate hikes through the rest of 2017. A narrowing of policy differences will help support a higher EUR/USD.

It appears that analysts and economists, riding the coattails of the ECB’s policy forecasts, have stopped expecting Euro-Zone data to underwhelm: the Citi Economic Surprise Index for the Euro-Zone has eased from +51.8 on February 17 to +48.1 on March 17. Yet while data has still be generally good, inflation expectations have fallen back with Brent Oil prices receding over the past month, down from $55.81/brl on February 17 to $51.76/brl at the end of the week. The 5-year, 5-year inflation swaps now yield 1.681%, downmodestly during the last month from +1.768% to 1.681% on March 17.

Chart 1: Oddschecker Implied Probabilities of Candidate Win (January 20 to March 17, 2017)

Political Risk for Euro-Zone Dissipating, Boosting EUR/USD Prospects

The big major hurdle remaining, now that the ECB, the Fed, and the Dutch elections are out of the way, is the French presidential election. Luckily for the Euro, right-wing ethnonationalist (acting under the guise of populism) Marine Le Pen has seen her odds of winning decline once again this week, providing levity to the Euro. Emmanuel Macron’s odds of winning the French presidency have increased to 63.1% according to Oddschecker, while Le Pen’s have dipped to 27.9%. Speculation around the French presidential remains the most important driver of the Euro, and it continues to drive the Euro in a direction of further strength. -CV

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--- Written by Christopher Vecchio, Senior Currency Strategist

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USD/JPY Eyes 2017-Low as FOMC Tames Interest Rate Expectations

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USD/JPY Eyes 2017-Low as FOMC Tames Interest Rate Expectations

Fundamental Forecast for the Japanese Yen: Neutral

The Federal Open Market Committee’s (FOMC) March rate-hike failed to prop up the USD/JPY exchange rate, and the pair appears to be working its way back towards the 2017-low (111.59) as the central bank tames interest-rate expectations.

USD/JPY Eyes 2017-Low as FOMC Tames Interest Rate Expectations

Source: FRB

Based on the updated projections, the FOMC appears to be on course to deliver three to four rate-hikes in 2017, but the reaction to the interest rate decision suggests market participants were largely disappointed as officials continue to forecast a terminal fed funds rate close to 3.00%. In turn, Fed Fund Futures are currently pricing a greater than 90% probability the committee will preserve the current policy at the next meeting in May, and the bullish sentiment surrounding the greenback may continue to unravel as the central bank persistently warns ‘market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.’

Moreover, Chair Yellen argued that the pickup in headline inflation was ‘largely driven by energy prices,’ and it seems as though the central bank may allow price growth to overshoot the 2% target for some time as the central bank pledges to ‘carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.’ With that said, market participants may pay increased attention to the key speeches on tap for the week ahead as a slew of 2017 voting-members on the wires (Chicago Fed President Charles Evans, New York Fed President William Dudley, Chair Janet Yellen, Minneapolis Fed President Neel Kashkari and Dallas Fed President Robert Kaplan), but the fresh batch of central bank rhetoric may do little to heighten the appeal of the greenback especially as the committee appears to be in no rush to remove the highly accommodative policy stance.

Nevertheless, the Bank of Japan’s (BoJ) Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control may continue to instill a long-term bullish outlook for USD/JPY as the central bank retains a dovish tone and pledges to keep the 10-Year yield close to zero. Indeed, Governor Haruhiko Kuroda warned the benchmark interest rate can be reduced further as the committee struggles to achieve the 2% inflation target, and it seems as though the BoJ will continue to expand its balance sheet for the foreseeable future as officials note ‘the year-on-year rate of change in the CPI is likely to increase from about 0 percent and become slightly positive, reflecting developments inenergy prices.’ The comments suggest the BoJ will also look through the recent pickup in price growth due to the transitory nature, and the bar seems high for the BoJ to move away from its wait-and-see approach as officials continue to monitor the impact of the non-standard measures. As a result, the broader outlook for the Japanese Yen remains bearish as the BoJ sticks with the slew of non-standard measures, but the dollar-yen exchange rate may continue to track the broad range from earlier this year as market participants gauge the future pace of the Fed’s normalization cycle.

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USD/JPY Eyes 2017-Low as FOMC Tames Interest Rate Expectations

The near-term outlook for USD/JPY is tilted to the downside following the string of failed attempts to close above the 115.10 (50% retracement) hurdle, with the pair at risk of working its way back towards the February low (111.59) as it starts to carve a series of lower highs & lows. Nevertheless, Japan’s fiscal year-end may give way to range-bound prices, and the dollar-yen exchange rate may continue to consolidate within the range from earlier this year as the Fibonacci overlap around 111.30 (50% retracement) to 111.60 (38.2% retracement) offers support. - DS

CPI the Focal Point as a Shift Begins to Emerge Within the BoE

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CPI the Focal Point as a Shift Begins to Emerge Within the BoE

Fundamental Forecast for GBP: Neutral

The Bank of England hosted an interesting rate decision this week. No changes were made, and no rates were changed; but what was different was a dissenting vote within the BoE. Ms. Kristin Forbes voted for a rate hike and then explained the logic behind her decision in a follow-up article written for The Telegraph.

The big point of contention right now for the Bank of England is inflation; and the BoE is in a tough spot. The bank had taken a rather aggressive stance around the Brexit referendum. Little was certain in the days after Brexit, as we didn’t even know who would be in-office at 10 Downing Street after the surprise resignation of David Cameron: But what was known was that the Bank of England wasn’t taking matters lightly and would likely be stoking markets with dovish accommodation in the effort of proactively offsetting risks from the referendum. While GBP had started to recover in the days after Brexit, the impromptu press conference from BoE Governor, Mark Carney, in which he foreshadowed what the bank would do helped drag the value of Sterling right back down to the lows (GBP/USD was actually above 1.3000 at the time!). Mr. Carney said that ‘Brexit risks are starting to crystallize’ less than two weeks after the referendum.

In August the BoE launched a ‘bazooka’ of stimulus that entailed the bank buying a significant chunk of the Country’s corporate debt market, and this just depressed interest rates and the value of GBP even more. And the BoE warned that they could do more if need-be; so this was like a constant form of pressure that kept sellers around resistance to eradicate any form of a potential up-trend. In early-October, demand for the British Pound was so abysmal that the ‘flash crash’ happened when a dearth of buyers were unable to offset the rampant selling.

But inflation is unlikely to remain tame when a currency is shedding value at a breakneck-pace. Think of it from the perspective of a company importing products into that economy: If the British Pound falls by 20%, companies importing products from the United States or Europe are going to see a similar 20% hit to revenues, all factors held equal (because those producers have to exchange back-into their currency from a weakened GBP). And for many consumer retail companies, this could be the difference between profitability and losing money. So, to account for the dramatic drop in the value of GBP, producers would need to raise prices; and this is the initial signs of inflation. We started to see this theme come into the fray in early-November when the Bank of England had to upgrade their inflation forecasts just a couple of months after launching their out-sized bond buying program.

Initially the BoE appeared unmoved by those rising inflationary forces, claiming a relatively high tolerance for an ‘inflation overshoot’; giving the appearance that the BoE would remain dovish by stoking low interest rates until it was absolutely necessary to hike rates in the effort of containing inflation. And as the United States saw in the late 70’s with their own saga of stagflation, this can be a difficult prospect because once prices begin to rise, it can be difficult to stop, or even slow (Paul Volcker had to put the U.S. economy into recession with artificially elevated interest rates to stem ‘stagflation’ in the late 70’s).

In January, we started to see a change around the BoE as the bank’s Chief Economist, Andy Haldane, called Brexit the BoE’s ‘Michael Fish’ moment. He remarked that the massive economic slowdown that the BoE thought would come from the Brexit referendum simply hadn’t yet shown up. And further, the radical actions taken in the immediate wake of the referendum exposed the British economy to the potential for higher rates of inflation down-the-road given the additional losses that these dovish moves provided to the currency’s spot rate.

At this week’s BoE rate decision, we saw the first vote for a rate hike post-Brexit, and this came from Ms. Kristin Forbes. The meeting minutes indicated that other members may vote for a rate hike in the coming months, and the reaction since that rate decision has been GBP-strength. In her testimonial, Ms. Forbes says that while Brexit will continue to dominate the news and public debate, the BoE remains steadfast towards their mandate of 2% inflation. She remarked that inflation is already very close to the bank’s target today; but the BoE forecast of 2.7% inflation within a year warrants attention.

While this may be signs of an initial shift within the BoE, it’s simply too early to prognosticate how many members of the MPC may join Ms. Forbes as a dissenting vote at near-term rate decisions. The next Super Thursday isn’t until May 12th, and this is when we’ll receive updated inflation forecasts. Until then, we’re likely going to be reading tea leaves in the effort of seeing just how strong inflationary forces might be in order to tip the BoE’s hand around those next rate decisions; and next week’s CPI print on Tuesday morning will be key for such a theme. Now that we’ve seen a slight shift within the BoE, market sensitivity to stronger forces of inflation could easily increase; bringing gains to GBP on stronger inflationary reads.

For the next week, the forecast on the British Pound will be held as neutral. More signs of confirmed inflationary forces will need to be seen before a bullish forecast can be initiated.

Gold Prices Shine as USD Drops- Post FOMC Rally Eyes Initial Resistance

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Gold Prices Shine as USD Drops- Post FOMC Rally Eyes Initial Resistance

Fundamental Forecast for Gold: Neutral

Gold prices are higher this week with the precious metal up more than 2% to trade at 1229 ahead of the New York close on Friday. The rally marks the first weekly advance this month and comes alongside a sharp sell-off in the greenback and while the near-term picture may see prices struggle, the technical implications suggest gold may have turned a corner.

The FOMC raised interest rates by 25 basis points as expected on Wednesday with the accompanying dot plot and updated quarterly projections largely in line with market consensus. The release offered no fuel for the USD which had been close to unchanged on the year as markets drove the dollar back up from thet yearly lows to reprice a slightly more hawkish stance from the Fed.

However with the committee’s outlook broadly re-affirming expectations for three rate hikes this year, the greenback seems to be faltering - for gold prices, a softer dollar and an uptick in the central bank’s Core PCE (Personal Consumption Expenditure) projections were just the trigger needed to fuel a recovery as prices responded to a key support zone noted last week. Looking ahead to next week, event risk simmers down a bit with February Existing Home Sales & Durable Goods Orders highlighting the U.S. economic docket.

Gold Prices Shine as USD Drops- Post FOMC Rally Eyes Initial Resistance
  • A summary of the DailyFX Speculative Sentiment Index (SSI) shows traders are net long Gold- the ratio stands at +3.48 (77.7% of traders are long)
  • Long positions are 4.9% higher than yesterday and 1% above levels seen last week
  • Short positions are also 4.9% higher than yesterday but 17.7% below levels seen last week
  • The recent washout of short-positioning and building long-exposure does leave the immediate advance at risk heading into next week- especially as prices target near-term technical resistance.

Gold Weekly

Gold Prices Shine as USD Drops- Post FOMC Rally Eyes Initial Resistance

We came into this week looking for a low, noting initial weekly support, “at 1193 backed closely by a more significant confluence region at 1176/80 (61.8% retracement of the December advance and the 2013 low) - This is a key region of support and an area of interest for near-term exhaustion / long-entries. Broader resistance now stands with former slope support which converges on the yearly high-week close at 1234.” Fast-forward a week and prices have posted an inside weekly-reversal with the high registering at 1233.

Bullion has made a simple rebound off downslope support and while I still do like prices higher, we’re likely to see some consolidation here first. Bottom line- a breach above the 1234 is needed to mark resumption of the broader advance off the December lows with such a scenario targeting the 52-week moving average ~1255 & the upper parallel / 61.8% retracement at 1278.

Gold Daily

Gold Prices Shine as USD Drops- Post FOMC Rally Eyes Initial Resistance

Gold Prices Shine as USD Drops- Post FOMC Rally Eyes Initial Resistance

A closer look at the daily chart further highlights near-term structural resistance at the confluence of a pair of longer-term median-lines just higher. Expect some kickback from here but pullback’s should be viewed as opportunities for long-entries while above this week’s low with a breach higher targeting initial resistance objectives at the March open / 2017 high-day close, 1248/52 backed by the 200-day moving average (currently ~1260) & the 1278 key resistance level. Initial support is eyed at 1220 backed by the 100-day moving average at 1208.

---Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex contact him at or Click Here to be added to his email distribution list.


Canadian Dollar: Holding Up Well as Oil Price Drops

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Canadian Dollar: Holding Up Well as Oil Price Drops

Talking Points:

The past fortnight could have been a terrible one for the Canadian Dollar, with the price of benchmark West Texas Intermediate crude dropping from above $53 per barrel on March 7 to below $49 now. Yet over the same period the currency has actually appreciated modestly, with USDCAD dropping from around 1.34 to 1.3351 at the time of writing.

For sure, the Loonie was helped by the US Dollar’s drop as the Federal Reserve raised interest rates as expected but was more dovish in tone than many market participants had expected. Nonetheless, USDCAD had weakened for several sessions ahead of the Fed meeting and has made up little of the lost ground since.

Chart: USDCAD 30’ Timeframe (March 8 – March 17)

Canadian Dollar: Holding Up Well as Oil Price Drops

Chart by IG

As Canada is a major oil producer, its currency is closely correlated with the price of oil and it’s not impossible that the Organization of the Petroleum Exporting Countries will extend its oil output cuts beyond June this year to help prices recover in the face of a revival in crude production outside the group that has led to plentiful unused inventory. Saudi Energy Minister Khalid al-Falih said as much in an interview with Bloomberg on Thursday.

Meanwhile, the main economic event in Canada in the week ahead is the Federal budget but that is unlikely to include any major tax reforms or additional stimulus measures above and beyond thoseannounced in last year’s budget. The economy is growing at a respectable pace, with GDP expected to expand by around 1.8% annualized in the first quarter. Yet the Bank of Canada is unlikely to turn hawkish while the shadow of US President Donald Trump’s trade policies hang over it.

Economically, therefore, it’s steady as you go – and that’s likely to be true of the currency too.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him

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Australian Dollar Looks Short of Clear Direction

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Australian Dollar Looks Short of Clear Direction

Fundamental Australian Dollar Forecast: Neutral

  • The extent of US Dollar weakness after the Federal Reserve raised rates was surprising
  • It put AUD/USD back within range of its highs for the year
  • But the impetus needed to break through them doesn’t seem to be coming this week

It’s confession time. I was 180 degrees wrong.

Last week I wrote that the Australian Dollar stood to suffer if the US Federal Reserve delivered on its well-flagged interest rate hike, and stuck to its guns regarding the prospect of two more this year.

Well the Fed did deliver. But the Australian Dollar rose against the greenback, admittedly along with just about everything else. And a new expression entered common usage: the “dovish rate hike.”

Now the story goes that the Fed just wasn’t hawkish enough for the market, and that is why the Dollar fell in the wake of what, intuitively, looked like a pretty supportive performance from Fed Chair Janet Yellen and company last Wednesday.

This version of events doesn’t entirely convince everybody. Indeed, it doesn’t entirely convince me. How much more hawkish was a central bank which has raised rates only thrice in nearly ten years ever likely to sound?

I’m in quite good company. Goldman Sachs’ chief economist Jan Hatzius reportedly responded to the question “was it (the Fed’s decision) a big dovish surprise overall,” with a succinct “no”.

Anyway, confession over. What of the coming week? Well, there isn’t a lot of first-tier data to influence either side of the AUD/USD cross. We will see the minutes of the Reserve Bank of Australia’s last policy meeting on Tuesday. But that March 6 conclave was a “steady as she goes” affair if ever there was one, and official RBA commentary in the past few weeks has strongly suggested that Aussie interest rates are going nowhere soon.

Concurring, the futures markets aren’t pricing in any changes to the record low 1.5% official cash rate this year.

For the moment, AUD/USD is holding on to most of its Fed-inspired gains. But it’s still unable to close the gap between this year’s peaks and the highs it fell from right after the US Presidential election last November ushered in the “Trump trade.” The pair has failed at those peaks twice this year, and the coming week offers little obvious sign that it can break through them, even if it offers few clear hazards either.

The Fed is driving: AUD/USD

Bulls might use a comparatively quiet week to take another tilt at the highs as long as they remain within striking distance. But if they didn’t do that on the back of last week’s post-Fed momentum, it’s hard to see why they’d risk it now.

So, a neutral call it has to be.

We’re only weeks away from first-quarter’s end. How are the DailyFX analysts’ forecasts holding up?

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX

Kiwi Gains After Dovish Fed, But Shift in Stance from RBNZ Doubtful

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Kiwi Gains After Dovish Fed, But Shift in Stance from RBNZ Doubtful

Fundamental Forecast for NZD/USD: Bearish

- NZD/USD gains were driven primarily by the FOMC, not positive data from New Zealand.

- Recent data from New Zealand has actually been disappointing – GDP especially.

- GDP print means RBNZ is unlikely to alter its accommodative stance on rates at its meeting on March 23.

The New Zealand Dollar gained on the US Dollar this week as markets evinced disappointment that the US Federal Reserve wasn’t more hawkish on interest rates after raising them on Wednesday. However, the Kiwi has given back some of those gains since, with softer economic data hammering home the dovish message from the Reserve Bank of New Zealand, which held the official cash rate steady at record lows of 1.75% at its February policy meeting, and suggested that it could remain there for two years or more. The RBNZ Governor added that the currency ought to be lower than current market pricing.

Earlier this week, the Kiwi fell against its major counterparts after fourth quarter GDP data missed expectations. New Zealand’s economy grew 2.7% y/y versus 3.2% expected and 3.3% in the third quarter (revised lower from 3.5%). The nation’s output increased by 0.4% q/q versus 0.7% expected and 0.8% prior (also revised lower from 1.1%). This marked the slowest pace of quarterly expansion since July 2015. Front end New Zealand government bond yields fell simultaneously with the data’s release.

Data were mixed on Friday, with the March consumer confidence index from lender ANZ and research firm Roy Morgan slipping 1.7% on the month to 125.2. This came after news that New Zealand’s manufacturing sector expanded strongly in February. The Performance of Manufacturing Index came in at 55.2 for the month, well above January’s revised 52.2. This series is analogous to the Purchasing Managers Indexes (PMIs) released globally. Any reading above the 50 line signifies sectoral expansion. The index is now at its highest level since last September and January’s PMI dip now looks largely seasonal in nature.

Next week’s docket is sparse, apart from the RBNZ rate decision on Wednesday. The New Zealand Consumer Sentiment Index will be released Sunday, followed by Dairy Auction Prices on Tuesday, and Trade Balance figures on Thursday. None of these data should hold too much influence with the RBNZ decision on tap.

At the March 23 policy meeting, the RBNZ is once again expected to maintain the official cash rate at 1.75%, and continue to push a neutral if not dovish bias. At the previous RBNZ decision, Governor Wheeler made clear the intention to keep rates at their present level for the entirety of 2017, dispensing any rate hike expectations markets had priced in for this year. Likewise, given his complaints that the Kiwi was overvalued and that global risks remain – a clear reference to the rise of protectionism, led by the United States and the United Kingdom – there seems little reason to believe that, with recent GDP data having disappointed, the RBNZ will upgrade its tone. –OM

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--- Written by Oliver Morrison, Market Analyst

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