US DOLLAR
The narrow trade-weighted USD index extended its cumulative post-FOMC gain to nearly 1% in printing a high at 98.92, which is the highest level seen since May 1997. EUR-USD concurrently extended lower, reaching a fresh 27-month low at 1.1030 during the London morning, and while USD-JPY settled to the lower 109.0s, the pair had seen a fresh two-month peak during Tokyo trading at 109.32. The Dollar gains came as markets continued to react to the Fed signalling that its first-in-a-decade rate cut yesterday was not the start of a new monetary easing cycle, although standing ready to "act as appropriate to sustain the expansion." A fractional upward revision in July Eurozone manufacturing PMI data had little discernable impact. The Brexit-afflicted pound has managed to hold above recent lows versus the Euro, Yen and other currencies, but saw a 30-month low against the Dollar, at 1.2085. The BoE concludes its two-day MPC meeting today and releases its quarterly Inflation Report. The central bank is expected elevate the risk of a no-deal Brexit in its considerations into a more serious consideration rather than a footnote caveat. Elsewhere, an 11% y/y drop in South Korean exports in July raised eyebrows, being the eighth consecutive decline and given that South Korea is the world's sixth-biggest exporter and the first major industrialized nation to release monthly trade figures. This comes with Seoul and Tokyo at loggerheads in a trade dispute, and with the U.S. and China yesterday finishing the latest round of trade talks with little sign of progress.
CANADIAN DOLLAR
USD-CAD rallied to a near six-week high at 1.3219, snapping a run of of third straight days of lower lows, which left a 10-day low at 1.3105. Given the Fed's refrain from signalling an easing cycle, and given the risk-off impact in global asset and commodity markets, we expect further upside in USD-CAD. Support comes in at 1.3135-37.
EURO
EUR-USD etched out a new 27-month low at 1.1032 earlier in the London AM session, which extended the low seen during the early part of Asian trading by a couple of pips. A fractional upward revisions in July Eurozone manufacturing PMI data had little discernable impact with market participants continuing to digest the Fed's guidance. While the Fed delivered the expected 25bp rate cut, its first easing in a decade, it disappointed by characterizing it as only a "mid-cycle adjustment" while signalling that this was not the start of a new monetary easing cycle, although will remain ready to "act as appropriate to sustain the expansion." With the ECB geared-up for a policy easing in September, and with the upped-risk for a no-deal Brexit scenario, we expect EUR-USD will remain directionally biased to the downside. Trend support comes in at 1.0982-84, and resistance at 1.1120.
BRITISH POUND
The Brexit-afflicted pound has managed to hold above recent lows versus the euro, yen and other currencies, but saw a 30-month low against the dollar, at 1.2101. Market narratives have been acknowledging that the parliamentary arithmetic in the UK means that, with the government having a working majority of just two seats (and likely to drop to just one after a by-election today), Boris Johnson is in a weak position to pull-off a no-deal exit from the EU, given there are a number of his own Tory party members, some of which are vengeful after Johnson's brutal cabinet reshuffle, who might vote against their own government in the event that the Labour opposition tables a confidence motion against the government before the October-31 deadline. Also, there are arguments among UK political pundits that Boris and his Brexiteer cabinet won't want to give up position and power by risking a no deal, despite their threats, or a even snap general election that could backfire given the strength of support for the Brexit Party. Boris may, so this line of argument goes, instead look to find a face-saving means of exiting the EU in a political sense on October 31 while remaining in the single market and customs union for a timetabled multi-year period to negotiate new agreements with the EU, which is something Brussels may be happy to concede to if it takes the no-deal risk off the table. The problem for Boris, though, is that his weak government may not be amble to function well, if at all, in terms of passing legislature, so we think there is a good chance, despite current denials, that he will risk an election before October 31. Polling and the UK's first past the post system (meaning his Tory party would only have to win 35% of the vote to win a majority in parliament) suggests that there is a good chance that Boris could triumph in an election. Borish would also have an option of forming a coalition with the Brexit Party.
JAPANESE YEN
USD-JPY settled in the lower 109.0s after printing a two-month peak in Tokyo trading at 109.32, which came as markets continued to react to the Fed signal that its first-in-a-decade rate cut yesterday was not the start of a new monetary easing cycle. This sets the pairing up for its second consecutive up week, which would be the fourth weekly gain out of the last six weeks, having risen from a seven-month low at 106.77. A revisit of territory above 110.00 level looks likely.
