Home Daily Commentaries The ‘fear’ of interest rate hikes is weakening the US dollar

The ‘fear’ of interest rate hikes is weakening the US dollar

Daily Currency Update

The US dollar index continues its struggle to rally, trading at 96.75 and decreasing 0.28 percent this morning. However, it will probably resume trading within a range from 96.50 to 97.50 until the Fed decision tomorrow. Sophisticated market participants are nervously waiting for the Fed to raise it's key interest rate this Wednesday, calling that the Fed is overestimating where neutral is (the neutral rate is the theoretical federal funds rate at which the stance of Fed monetary policy is neither accommodative nor restrictive). Consequently, the recent “risk off” environment in the financial markets over the last few days is telling us that most market participants don’t want more rate hikes, but some economic data suggests that further tightening remains appropriate.

Hence, any disappointing economic data is being used as an excuse to sell off the equity markets and keep the FX markets' volatility subdued waiting for more clarity from the Fed and its FOMC rate decision tomorrow. On top of that, the US dollar was pressured to the downside as the chorus grew louder for the Fed not to raise rates with a tweet from Donald Trump and Peter Navarro echoing the same.

On the release side, housing starts month to month for November came in at -3.2 percent higher than expected at 0 percent, and building permits month to month for November came in at -5.0 percent higher than anticipated at -0.4 percent. The US dollar index might bounce after this news.

Key Movers

The Loonie is trading flat this morning due to mixed catalysts. It was helped by a weak US dollar and it was pushed lower by oil prices, which continued an abrupt decline. In it's drilling productivity report released yesterday, The U.S. Energy Information Administration estimated that U.S. shale oil production would rise by 134,000 barrels a day from December, to reach 8.17 million barrels a day in January. In addition to that, there are worries that global growth deceleration could deter demand for oil. The correlation of crude with the general fall in global equity is very high at this point.

The Loonie is expected to trade in a narrow range until tomorrow when the Canadian consumer price is published. A lower than expected number can be used as an excuse to sell off the Loonie. Besides that, the USD/CAD will have more clarity after the FOMC rate decision is published tomorrow at 2pm EST.

On the release side, the manufacturing sales month to month for October came in at -0.1 percent lower than expected at 0.4 percent. The USD/CAD opened at 1.3411 yesterday and it is trading at 1.3412 as of the time of this writing.

The Euro appreciated yesterday, and it is not different today, touching the 1.1400 handle this morning. The single currency was boosted by the news that the populist coalition Italian government has settled on a 2.04 percent fiscal deficit target for 2019. Italian Deputy Prime Minister Salvini announced, “we’ve reached agreement on everything.” While the European Commission is yet to ratify the proposal, the watered-down deficit target certainly reduces the risk of financial penalties for Italy.

In other recent news, the German Ifo Business Climate printed slightly weaker than expected overnight, at 101.0 versus forecasts for 101.8. Despite this, the EUR/USD continues jumping higher - a result of a heavily offered US dollar this morning. This is itself a consequence of re-positioning ahead of the FOMC tomorrow.

The cable rate traded a steady range for most of the day yesterday. If anything, it was biased mildly higher as risk sentiment improved and the dollar weakened through the day. On the Brexit front, Theresa May gave an update to the House of Commons on her recent trip to Brussels and where it leaves her proposed Brexit deal. She also said MPs would not vote on her Brexit deal until the week of January 14th. In response, Jeremy Corbyn tabled a motion of no confidence in the PM, calling on MPs to declare “no confidence in the prime minister due to her failure to allow the House of Commons to have a meaningful vote straight away." He stopped shy of declaring a motion of no confidence in the government, which could have brought about an early election.

The no-confidence vote has been dismissed by Number 10, and so the Pound has been mostly unaffected. The GBP/USD continued to push higher yesterday, and the pair opened towards the top end of it's recent range this morning; this before ministers meet to discuss and consider a no-deal Brexit plan. Meanwhile, the latest rumor is that ministers are receiving ‘secret legal advice’ on extending Article 50. If this were to happen, it reduces the chances of a no-deal but means the uncertainty and associated impact on the economy could continue for longer.

Brexit remains front and center for traders at the moment, but they will also have half an eye on tomorrow’s much anticipated US FOMC decision. UK inflation data is also due tomorrow, which is an important set of data, and perhaps a good distraction for traders from the ongoing Brexit saga. The GBP/USD is trading at 1.2678, 0.46 percent higher at the time of this writing.

The Australian dollar traded in a tight range yesterday. Although flat, the broader theme for the session was US dollar weakness. US equity markets fell on Monday; the Dow Jones Industrial Average was down 400 points (- 1.68 percent) and is on track to close at it's lowest level since the beginning of April. The S&P 500 and the Nasdaq were both lower by about - 1.7 percent.

In overnight news, RBA minutes had little impact on the local unit, with the central bank appearing to be a bit more cautious in it's approach to setting monetary policy. It was not quite enough to detract from saying that the next move would be a hike, though not soon.

AUD/USD has pushed higher this morning amid a sell-off in the US dollar. All eyes now turn to the FOMC announcement in the US. The AUD/USD pair is trading at 0.7190, but it touched a high of 0.7203 in the overnight trading session.

The Kiwi rallied overnight, coming close to breaking through 0.6900. It got a boost from much better than expected business confidence data, by way of the ANZ Business Outlook Survey. It’s also being supported by weakness in the US dollar this morning. There’s more local data on the way later tonight, including Westpac Consumer Sentiment and NZ Current Account. NZD/USD is trading at 0.6864 at the time of this writing.

Expected Ranges

  • USD/CAD: 1.3376 - 1.3432 ▲
  • EUR/USD: 1.1370 - 1.1408 ▲
  • GBP/USD: 1.2626 - 1.2701 ▲
  • AUD/USD: 0.7167 - 0.7210 ▲
  • NZD/USD: 0.6817 - 0.6899 ▲