The greenback ended up as the strongest major currency last week after much volatility in the markets. Stocks' strong rebound after FOMC statement suggested that markets took the message that Fed will be patient about hiking interest rate, and thus, shouldn't provide much support to the dollar. Indeed, dollar lost some momentum after initial rally against commodity currencies and was still stuck in range against Sterling. SNB's surprised introduction of negative rates was the biggest news in the currency markets last week. While dollar looked topped before that, SNB's move pushed USD/CHF to new two year high and dragged EUR/USD through recent low of 1.2246. The dollar index, thus, took out 89.55 high to resume recent up trend. Thin trading is expected in the two holiday weeks ahead and we might see the dollar extend the current rise to have a strong yearly close.
Here are some recaps of the major events of the week. Fed members removed the 'considerable time' language in the December FOMC statement, suggesting that, based on its current assessment, 'it can be patient in beginning to normalize the stance of monetary policy'. The overall tone of the statement remained dovish. Fed Chair Yellen talked about the recent decline in oil prices in the press conference, indicating that it should have a transitory effect on inflation and would stimulate growth. She also noted that Russia's economic crisis would only have limited impacts on the US.
The BOE minutes for the December meeting showed that the members had detailed discussions over the recent decline in oil prices. They indicated that the selloff in oil prices turned out to be more sharply than they expected in November. Policymakers had different views over the economic outlook and the monetary stance. Yet, the spread appeared less diverse than the prior month as the reference suggesting members were holding 'material spread of views disappeared. The central bank voted 7-2 to keep the policy rate unchanged at a record low of 0.5% and decided unanimously to keep the asset purchase program at 375B pound.
The SNB surprisingly announced to cut interest rate to -0.25% on sight deposit account balances that exceed a given exemption threshold. Negative interest is expected to be levied from 22 January 2015. The move attempts to limit unwanted CHF appreciation and alleviate pressures on the EURCHF floor. The central bank in the accompanying statement reiterated its pledge to the EURCHF floor if 1.2 and would 'take further measures, if required'.
BoJ maintained the unprecedented stimulus as widely expected. Policy makers voted 8-1 to hold the annual target of monetary base expansion at JPY 80T and interest rate is kept near zero. Board member Takahide Kiuchi dissented again and called for reduction to previous JPY 60T to JPY 70T. BoJ struck a slightly more optimistic tone regarding the economy and said it " continues to recover moderately as a trend". Assessment on exports and output was also revised up.
The RBA minutes for the December meeting offered little news. Policymakers warned of the strength in Australian dollar and suggested that further depreciation would be needed to 'achieve balanced growth in the economy'. The minutes retained the reference that 'members considered that the most prudent course was likely to be a period of stability in interest rates', suggesting that the central bank attempted to downplayed expectations of further rate cut next year.
Dollar index's pull back from 89.55 was contained at 87.62, above 87.53 support and thus maintained the bullish outlook. The break of 89.55 indeed indicated resumption of recent up trend and further rise would be seen. Also, it should be noted that 89.62 key resistance was also breached. Further rise would likely be seen in the index in near term for 90 psychological and above. However, as bearish divergence condition remains in daily MACD, we'd be cautious on topping around 100% projection of 72.69 to 84.75 from 78.90 at 90.96.
Regarding trading strategies, we maintained USD/CAD and EUR/AUD long last week. EUR/AUD edged higher to 1.5331 but lost momentum after hitting USD/CAD also lost momentum after hitting 1.1672. We'd prefer to close out the positions first and enjoy our holidays and have a look at trading again after the new year break.