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Markets Higher
As Fed Looms

by Stephen Casey | December 13, 2016

– Chinese Data Sparks Risk Rally

– UK CPI Gives Sterling a Boost

– Dollar in Tight Range Ahead of Fed

 

Good morning. Markets continue to spread the holiday cheer this Tuesday morning, a little more than one day ahead of the final Federal Reserve meeting of 2016. Equities and commodities markets are all higher, buoyed today by better than expected Chinese data and a nice little rebound in Italian bank shares to spark a European rally. Sterling found a bid on higher than expected consumer prices, pacing an otherwise quiet European session. North American markets look to continue the good vibrations, with futures pointing to another higher open. The greenback began the week a little lower but has mounted a mild comeback as we go to print.

The Chinese yuan actually appreciated overnight, after reports that industrial production and retail sales grew at a faster pace in China during the month of November. The growth in Chinese retail sales was the strongest of the year, while industrial output was sparked by swelling steel production. It was an otherwise quiet trading session with the Japanese yen kept to a very tight range. There were a number of key data points to pace Europe’s session with UK CPI taking the majority of the overnight headlines. Consumer prices hit the best pace in over two years in the UK, which bumped sterling higher by 0.30% against the greenback. The euro fell a few points versus the big dollar as weaker than expected European employment appears to be cancelling out German and Spanish inflation figures. German December ZEW was also a mild disappointment, coming in at 13.8 versus 15.1.

On Monday, the big dollar was broadly lower, losing ground against most major currencies. The data calendar remains very quiet until tomorrow, when markets will get a look at November retail sales and producer prices – before the Federal Reserve meeting. As has been widely reported, American policymakers are expected to raise the main interest rate by 25 basis points, to within a 0.50-0.75 percent band. The Fed will also be releasing their latest economic projections (dot plot) and Chairman Yellen will be conducting her final press conference and Q&A session for 2016. The risks appear to be broadly balanced going into tomorrow’s meeting. The huge jump in oil prices on Monday also kept the dollar trending lower – black gold jumped by as much as $2-per-barrel following the weekend agreement that OPEC and key non-OPEC countries finally agreed to the first production cut in fifteen years. The greenback enjoyed a mild comeback on Tuesday but remains within a very tight range ahead of tomorrow’s key events.

The Canadian dollar was one of the biggest winners on Monday, benefiting from the jump in oil prices. USD/CAD slipped to its lowest levels since mid-October on the agreement. Technically, the USD/CAD rate is testing strong trend line support which dates back to May of this year. It should be interesting to see if any worries concerning the Fed weighs on this rate and opens up some real downside momentum. Overnight, the loonie enjoyed a bit more support but like its southern neighbour, remains within a very tight trading range at the moment. The data calendar is very quiet this week for Canada so it is likely that broader market themes guide price action for the loonie. October manufacturing sales pace what is an otherwise very quiet week.

 

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