December rate hike boosted by encouraging Fed minutes
Market action was interrupted by various holidays around the world but overall the U.S. dollar continued to rebuild the momentum it had after the elections. The minutes from the U.S. Federal Reserve meeting in November sent a strong signal about a December rate hike. The CME’s FedWatch tool is showing a 93.5 probability of a rate hike on December 14. The infrastructure spending comments from president-elect Trump has also boosted rate hike expectations for next year expanding the monetary policy divergence between the U.S. and other major markets.
Commodity currencies will be on the radar as the Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna takes place on November 30. An oil freeze agreement hashed out in March has faced multiple challenges but has managed to stop the free fall of energy prices in 2016. There are doubts about the organization being able to pull off the agreement with Iran and Iraq not willing to participate for the time being. The Canadian dollar will be in the spotlight at it will react to the outcome given its high correlation to crude prices.
Employment has been the strongest pillar of the U.S. economic recovery and will feature heavily on the fist days of December. The release of the ADP payrolls data on Wednesday, November 30 at 8:15 am EST, Unemployment claims on Thursday, December 1 at 8:30 am EST and the biggest economic indicator the U.S. nonfarm payrolls (NFP) on Friday, December 2 at 8:30 am EST will be in investor’s calendars given their impact to different asset classes at the start of a very busy final month of year.
The EUR/USD gained 0.028 percent in the last week. The single currency managed to eke out a positive week versus the USD and is trading at 1.0602 with thin trading volumes while the U.S. Thanksgiving holiday continues. The meeting minutes from the November Federal Open Market Committee (FOMC) boosted the USD with heavy hints at a December rate hike. Fed members have done their duty to prepare markets for the high probability of an interest rate hike at the end of the year. A repeat of 2015, the Fed’s patience once again has resulted in a single rise in borrowing costs. Central banks are stretched after years of accommodative policy around the world and it is up to governments to step up. One of the positives of the Trump shock election victory is the commitment to spending in infrastructure with the goal of creating jobs. Inflation expectations had been week in the last couple of years in the U.S. and in some cases held back the American central bank.
The Fed was already talking up the possibility of letting the economy run a little hot, and with Trump’s comments on spending there is some inflation expectations heating up. If the U.S. government is willing to share the burden of boosting growth the number of interest rate changes in the U.S. could be more inline with previous forecasts of 3 or 4 rate hikes. The USD appreciates the more higher interest anticipation builds up in the market, specially as other central banks are still caught in their battle against deflation. In particular the Bank of Japan (BOJ) and the European Central Bank (ECB) will have to be proactive and creative as they are going into new territory the deeper they go into negative rates and the scope of their bond purchasing programs.
The USD/JPY appreciated 2.277 percent in the last five days. The Yen has fallen to 113.13 from the 110 price level it started the week. The release of the FOMC minutes and the high probability of a December rate hike by the Fed has boosted the USD versus the Japanese yen. U.S. economic data has been supportive of the dollar as it heads into the last month of the year. Thanksgiving holidays in Japan and the U.S. made for light trading sessions. The dollar has recovered from the election uncertainty and regardless of the unexpected outcome of a Trump presidency the currency has recovered based on higher inflation and growth expectations.
Yen weakness is welcomed by the BoJ as it could positively impact inflation. Abenomics has failed to get the promised traction, but taken into context it has also faced a steeper uphill climb than originally intended. The bold approach from PM Shinzo Abe and BOJ Governor Haruhiko Kuroda did stop the deflationary bleeding, but with low global growth and resistance at home to raise wages it has stagnated.
With the Fed being the most heavily anticipated central bank to make a statement in December there can also be action from the ECB and the BoJ. The BoJ could wait until the full market reaction to the Fed rate hike is priced in, before making their move in the first quarter of 2017. The ECB made was what is now considered a monetary policy over eager decision by preempting the Fed in 2015. If the lessons of last year have been learned by both central banks they could wait for Fed Chair Janet Yellen to set market expectations before President Draghi and Governor Kuroda try to exert their influence.
West Texas gained 1.678 percent last week. The price of energy is trading at $45.92 as the OPEC deal uncertainty has kept crude volatile. Regardless of the weekly gain West Texas Intermediate has been trading lower in the last two days. Doubts about next week’s meeting in Vienna are growing as OPEC members are still on the same page of the production cut agreement. At the same time non-OPEC members, Russia in particular, have given a blessing to the deal but have not committed to anything above the original production freeze agreement from the meeting in March that ended in a spectacular failure with Iran and Saudi Arabia caught in a visible rift. The two have gone on to work out their differences but now Iraq has broken ranks and demands an exception from the production limits.
Non-OPEC members are meeting on Monday but Saudi Arabia has chosen not to participate until an OPEC deal is agreed. The price of oil has been sensitive to the market’s perception of how likely the world largest producers will reach a coordinated effort to reduce global supply.
Market events to watch this week:
Monday, November 28
9:00am EUR ECB President Draghi Speaks
Tuesday, November 29
8:30am USD Prelim GDP q/q
10:00am USD CB Consumer Confidence
3:00pm NZD RBNZ Financial Stability Report
5:00pm NZD RBNZ Gov Wheeler Speaks
Wednesday, November 30
8:15am USD ADP Non-Farm Employment Change
8:30am CAD GDP m/m
10:30am USD Crude Oil Inventories
7:30pm AUD Private Capital Expenditure q/q
8:00pm CNY Manufacturing PMI
8:45pm CNY Caixin Manufacturing PMI
Thursday, December 1
Tentative GBP Bank Stress Test Results
4:30am GBP Manufacturing PMI
8:30am USD Unemployment Claims
10:00am USD ISM Manufacturing PMI
7:30pm AUD Retail Sales m/m
Friday, December 2
4:30am GBP Construction PMI
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate