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Risk Aversion Dominated Markets, Dollar Soft Ahead Of FOMC

Published 12/17/2014, 05:05 AM
Updated 03/09/2019, 08:30 AM

Markets continue to stay in risk averse mode on the plunge in oil price and financial turmoil in Russia. WTI crude oil's steep decline continued and reached as low as 53.6 yesterday before recovering mildly. It's lost 50% since starting the fall back in June at around 107 level. . After by the development in oil price, Russian Rubble plummeted as mush as 19% yesterday and suffered the biggest one day drop in sixteen years. Even the surprised rate hike from Russia's central bank earlier couldn't stem the decline. DJIA extended recent fall and lost -111.97 pts, or -0.65% to close at 17068.87. S&P 500 dropped -16.89 pts or -0.85% to close at 1972.74. Flight to quality boost US treasuries with 30 year yield dropped to 2.7%, hitting the lowest level in two years.

Dollar index dropped to as low as 87.62 before recovering and is having it's sight on key near term support level at 87.53. The Japanese yen is so far the strongest currency this week on risk aversion while commodity currencies are under tremendous pressure. Meanwhile, European majors are generally higher, partly due to fund flows from Russia. Development in EUR/USD and USD/CHF continues to point to trend reversal but GBP/USD somewhat lagged behind.

BoE minutes and FOMC rate decisions are the main focuses today. The BOE in December announced to leave the Bank rate at 0.5% and maintained its asset-purchase program at GBP 375b. We believe the decision suggested that policymakers remained concerned about spare capacity in the labor market. From August 2015, the MPC would publish the minutes of its meeting and the Quarterly Inflation Report at the same time. It was also proposed that there would be 8 monetary meeting, rather than 12, in a year. According to BOE Governor Mark Carney, the reforms were "the most significant set of changes to how we present and explain our interest rate decisions since the Monetary Policy Committee was formed in 1997... These changes will enhance our transparency and make us more accountable to the British people". UK will also release job data. Also to be released from Europe are Eurozone CPI final and Swiss ZEW.

While it is almost definite that no change in the monetary decision would be seen in the FOMC meeting, the market is interested in seeing whether there would be changes in the statement language. Indeed, the better-than-expected employment data in November should lead the Fed to be more upbeat. The number of payrolls increased much more than expected in November. Payrolls increased 321K in November, while figures in September and October were revised higher by a total of 44K. The unemployment rate stayed unchanged at 5.8%. Meanwhile, average hourly earnings growth accelerated to 0.4%. The pleasant surprise might trigger to Fed to remove the "considerable time" language in describing the timing of low interest rates.

That said, a number of issues should make the Fed more cautious in beginning the tightening cycle. Inflation continued to underperform the Fed's target. Headline CPI stayed unchanged at 1.7%yoy in October while core CPI picked up modestly to 1.8%, from 1.7%, during the month. The gasoline index fell for a 4th straight month, dropping -3% in October and, in total, -8% over the past 3 months. The overall energy index fell -1.9%. Inflation in November probably eased to 1.5%yoy while the core reading stayed unchanged The Fed would likely take a more cautious approach in its tightening policy in light the soft inflation environment. Also to be released in US session are US CPI, current account balance and Canada wholesale sales.

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