Currency Market Analysis

Dec 16, 2015 | Currency Market Analysis

Global Themes

Decision Day for the Federal Reserve found the U.S. currency mostly muted. A wide majority expect the U.S. central bank today to finally raise interest rates for the first time since 2006. The dollar has enjoyed a long rally to multiyear highs in anticipation that the Fed would boost rates and thus the buck’s attractiveness, particularly at a time when rival central banks are actively pursuing low rate policies to keep their nascent recoveries intact. Forecasts call for the Fed to remove the training wheels from the economy with a 25 basis point increase from near zero levels. Also critical for the dollar will be the Fed’s fresh forecasts for the economy and interest rates, and how likely it is to boost rates in the future. Uncertainty is aplenty whether the dollar today will sink or swim at the hands of the Fed. That’s why we urge companies to place limit orders now well ahead of the Fed’s 2 p.m. ET decision to help protect their bottom line in the event the market moves aggressively against them.


The euro neared a one-week bottom against the dollar but could explode in either direction once the Fed renders its long awaited interest rate decision, due today at 2 p.m. ET. With the Fed dominating the spotlight, the euro took little support from news of an upgraded revision to area inflation which now stands at 0.2 percent, a November number. Still, the barely positive reading keeps the European Central Bank on a low rate policy path that tends to come at the price of a weaker currency.


Sterling briefly tipped below a critical threshold against the dollar after mixed U.K. jobs news reinforced Britain’s low rate outlook. Unemployment improved a notch to 5.2 percent, a new seven-year low. The news, though, was overshadowed by data showing a bigger than expected reduction in pay growth which moderated to 2.0 percent, the slowest since February, from 2.4 percent, well below ideal levels around 4.5 percent, and suggesting customers were in no shape to endure higher borrowing rates anytime soon. The pound could soon be in trouble if the Fed today should stop short of setting a high bar to rate hikes next year.


The yen slipped to fresh lows on the week against the dollar with market focus squarely on the Fed’s 2 p.m. ET decision today. The Fed is sure to hand dollar-yen a key catalyst that could shape sentiment into the early stages of 2016. Watch the Bank of Japan (BOJ) this week, too. The BOJ renders its final decision of the year on Friday at which no changes are expected.


Canada’s loonie kept near 11-year lows against its U.S. counterpart in muted, pre-Fed trade. Oil, around $37, started the day with a decline, boding poorly for loonie sentiment. After the Fed today, next up to drive the loonie will be Friday figures on Canadian inflation. Some relief could soon come the loonie’s way if forecasts for an uptick in inflation are realized. Any disappointed, though, could spell trouble for the commodity battered currency.


The calm before the Fed? The dollar was little changed, awaiting, like the rest of the world, the Fed’s latest decision on interest rates. What the Fed does with rates today and what it signals about its intentions for them next year will mean everything for the dollar. Consequently, the dollar is at heightened risk of sinking or swimming shortly and potentially for the foreseeable future. But don’t underestimate the upside of a U.S. rate hike as it would mark a major milestone improvement for the economy and open the door to the normalization of U.S. monetary policy which carries perks for the dollar, especially while other banks are struggling to keep their economies afloat.

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