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GLOBAL MACRO PODCAST KEY TAKEAWAYS:

  • The FOMC regarding the monetary policy may determine the direction of the USD.
  • Narrowing of European sovereign bonds could signal a stronger Euro.
  • Strong declines in Chinese industrial profits may lead to an accommodative PBOC.

WHAT'S GOING ON WITH THE USD?

USD is experiencing a bearish flag formation when it took a large hit downward and has now slightly corrected since the announcement of the temporary end to the government shutdown.

WHAT DOES THIS MEAN?

The USD is a proxy for risk since a strong USD indicates that global flows are coming in and treasuries are being bought. However, if the USD ends up weakening, this will result in less global flows. One of the major factors that will determine the fate of the dollar is the FOMC meeting taking place January 30, 2019 at 2pm EST. Last year, the Fed had predicted two interest rate hikes for 2019 and adjusted their expectations down to one hike with a potential cut for the following year. This gives out a signal of how they may feel the market will perform.

WHY IS THIS IMPORTANT?

Today’s monetary policy meeting will be the first in 2019. If they decide to tighten the monetary policy (i.e., hawkish approach) this may lead the USD to appreciate, whereas if they were to decide to use expansionary measures (i.e., dovish approach), this will depreciate the USD resulting in a riskier outlook.

WHAT IS A BEARISH FLAG FORMATION?

When a currency experienced a bearish downward trend (flag pole) followed by a slight recovery (flag) and then takes another sharp fall.

Bearish Flag Formation

Source: DailyFX

GGGB

Source: Bloomberg

WHAT'S GOING ON ?

The spread between the Greek 10-year bond and the German bund have narrowed.

WHAT DOES THIS MEAN?

Since the German bund is considered a risk-free asset, the lower spreads between the sovereign bonds indicate that Greece’s economy may be improving. The chart above illustrates how the Euro and the bond spreads are aligned meaning that the narrowing of spreads will have a positive effect on the Euro.

China Industrial Profits

Source: Bloomberg

WHAT'S GOING ON WITH INDUSTRIAL PROFITS IN CHINA?

One of the factors contributing heavily to China’s industrial profit decline is the trade war that caused a decrease in domestic demands. As illustrated in the graph above, in 2015, it took a sharp fall and continues to stay negative.

WHAT DOES THIS MEAN?

To control economic slowdowns, the PBOC may look into accommodating the economy by using an expansionary monetary policy. They are in the process of looking to sell central bank bills worth 20B Yuan to increase money supply.

WHY IS THIS IMPORTANT?

The increase in money supply will negatively affect the Yuan since the increase in money circulation can further depreciate the Yuan.

WANT MORE?

Sr. Analyst, Tyler Yell, CMT covers this indicator and more in the DailyFX podcast; Trading Global Markets Decoded that you can access here.

Written by Tyler Yell, CMT, Nancy Pakbaz, CFA