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Fixed Income, Currencies and Commodities Update

Authors: Akhil Majithia Co-VP Education/ Research, Joseph Whibbs Co-VP Education/ Research, Amogh Rajpal Research Analyst, Rohit Dabke Research Analyst



Fixed Income and Currency


United States

On October 30th, 2019, the Federal Reserve cut interest rates for the third time this year, following rate cuts in July and September. The purpose of these cuts was to ensure that the US economy does not slip into a recession amid uncertainty over Brexit and the US-China trade war. However, the cut signaled that borrowing costs will remain unchanged in the near term, unless the economy were to perform poorly. The chairman of the Federal Reserve, Jerome Powell, mentioned in his official announcement that the monetary policy was in good place and was likely to remain appropriate as long as the incoming information about the economy remained consistent with the Federal Reserve’s outlook.


The effects of previous rate cuts are still working their way towards boosting the economy. Risks pertaining to the trade war and confusion revolving around Britain’s exit from the European Union have moved in a positive direction since the Federal Reserve’s last meeting in September. Considering all these factors, a pause has been signaled on any future interest rate cuts.

While yields on longer-dated bonds showed little reaction, those on shorter-dated maturities that are more closely influenced by Fed policy expectations moved higher. The yield on the 2-year note rose to the highest since October 1 at about 1.67 per cent.


Canada

While the Federal Reserve of the United States cut interest rates as a safety measure, the Bank of Canada acknowledged the risk of an economic slowdown but decided to hold rates steady at 1.75% for a sixth-straight meeting.


This decision has a significant impact on the Canadian dollar, which is now the top-yielding Group-of-10 (G-10) currency. Interest Rates and Yield vary proportionally and hence rate cuts make yields lower. Thus, a series of rate cuts by the Federal Reserve in the United States have dropped the yield on the US dollar significantly against the Canadian dollar.


The Canadian dollar is the best performer this year in the G-10 with a 4.4% gain against the American dollar.


Commodities

The U.S. dollar remains near a multiyear peak despite projections for the domestic economy to slow in the months ahead. This is an enormous challenge to the commodity investors as the stability of the dollar continues to contribute to lower commodity prices.


The WSJ Dollar Index - which tracks the dollar against a basket of 16 other currencies - inched down less than 0.1% to 91.37 Tuesday, staying 0.7% below its 2019 high from September 30. The dollar rose to its highest level since March 2017 that day. It is still up nearly 2% for the year.


The large looming tariff uncertainty between the world’s two largest economies; The United States and China, which has seen global trade falter amid a massive slowdown in manufacturing activity has not discouraged U.S. consumer spending. With consumer spending being the biggest driver behind the dollar’s strength, analysts predict the economy to continue to grow given these favorable tailwinds. This marks a negative for the commodity investors, as a stronger and more stable dollar makes assets in the U.S. currency more expensive for foreign buyers. The newfound stability in the dollar has stopped the rise of gold and silver prices and is also contributing to lower energy prices.


The most-active Gold futures (COMEX) for December delivery slid another 0.9% to $1483.50, 5% below their six-year high in September. Future Prices are still up 17% for the year, supported by bets on lower interest rates that make gold more attractive to yield-seeking investors who are less likely to miss out on outsize returns from bonds when interest rates fall. Silver too slid 1.8%, marking an extremely discouraging week for commodity investors. These drops came after a batch of upbeat earnings for various U.S. banks such as Citigroup Inc. and J.P Morgan Chase & Co. who touched a record high following strong 3rd Quarter earnings report. Reports that the U.K and the European Union were also moving close to agreeing to a plan for Britain to leave the E.U also reduced the attraction of the precious metals and safe-haven assets. A rebound in U.S. Treasury yields has also hurt precious metals by making it less attractive for yield-seeking investors to own materials that offer no return simply for holding them.


The story was the same in the energy markets as U.S. crude oil slid 1.5% to $52.81 a barrel on the New York Mercantile Exchange, making for the 13th decline in the past 16 sessions. Prices are now 20% below their April peaks and saw Brent crude close 1% down at $58.74 a barrel on the Intercontinental Exchange.


In addition to the dollar’s strength, the predictions for a decrease in global demand and steady supply have also had downward pressure on crude prices. The International Monetary Fund became the latest body to decrease its projections for global growth last week, the latest sign in what has been a continued slowdown of the world economy.

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