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Fed Ups The Ante

by Stephen Casey | December 15, 2016

– Fed Raises Rates & Expectations

– US Dollar Moves Higher

– Oil Falls, Weighs Down Loonie

 

Good morning. The Fed fallout continues this Thursday morning, as investors continue to pour into the US dollar following yesterday’s key policy meeting. More analysis to come below, but Chairman Yellen and her colleagues decided to hike rates (as expected) and ramp up hopes for next year with American policymakers now prepared for three hikes in 2017. The Japanese yen has slumped almost 3% since yesterday’s announcement with the greenback charging higher against just about every single currency. Equity futures in North America are flat as markets are prepared to open as European and Asian bourses were generally higher overnight.

The euro, pound and yen have been some of the biggest losers following yesterday’s Fed meeting. The euro is now 250 pips off yesterday’s highs while sterling has crashed lower by more than 300 points. Euro-area manufacturing and services PMI figures missed the mark today, hurting the single currency’s cause – while better than expected UK retail sales (another post-Brexit beat) was not enough to combat the dollar’s surge. The Bank of England concluded their policy meeting today, leaving rates unchanged at 0.25%. British policymakers continued to warn about inflation – a theme which looks to be central as the calendar turns toward 2017. The Swiss National Bank left policy unchanged in this week’s edition of Forgotten News, as ‘neutral’ policymakers continue to complain about the overvalued franc while threatening intervention.

On the Fed, America’s central bank raised the main interest rate yesterday by 25 basis points, as was expected. The committee released their latest monetary policy statement, which increased their planned hikes for 2017 from two to three, which was a bit of surprise. The big dollar experienced a very sharp move higher in the hours following the announcement, following the two-year and ten-year treasury yields, which led the greenback higher. Chairman Yellen held a press conference following the 2 pm statement released and was extremely measured in her words, which was also expected. Ms. Yellen cautioned everyone that the Fed’s expectations are still very similar to those made in September although the rate hike should be viewed as a “vote of confidence in the economy.” The most interesting bit within the statement itself concerned inflation, as the Fed removed language that consumer prices may remain low in the near term – also giving the greenback a boost. When the dust had settled, the fed funds futures had fully priced in hikes for August and December of 2017, with more room to grow. The dollar index has pushed 1.3% higher as we go to print.

The US dollar looks to continue its ascent today amid of flurry of economic data. This morning markets will get a look at consumer prices and weekly jobless claims. Yesterday, retail sales data showed the American consumer remains optimistic as we head into the holiday season. While the monthly figures missed expectations, we bested annual projections by 0.2%. Oil initially jumped yesterday following the EIA report which showed a surprise draw to US crude inventories.

The Canadian dollar took a bit of a tumble late on Wednesday, in the aftermath of the Fed. Crude prices slumped by as much as 4% at one point, which helped nudge USD/CAD higher by more than 1%. The USD/CAD rate jumped higher off of strong technical support just as the Fed statement was announced, keeping the longer term trend intact. Before Wednesday, the Canadian dollar had advanced versus the big dollar for seven of the previous eight days. The loonie continues to mimic oil prices, which have edged higher as more details emerge concerning the OPEC production cut agreement. The data calendar is quiet up north until next Thursday, when November retail sales are reported.

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