Weekly Outlook Ending on 19th November 2016
Dollar surges in expectation of December Fed interest rate Hike
The dollar rose to its highest level since April 2003 against a basket of currencies on Friday, marking its biggest two-week increase since March 2015 as traders piled bets on a massive dose of fiscal stimulus under a Trump U.S. presidency. Also stoking the dollar rally were growing expectations the Federal Reserve would raise interest rates next month on signs of rising inflation and improved economic growth. The greenback has climbed 7.3 percent against the yen in two weeks, its steepest such gain since January 1988 and its second-strongest performance in the era of floating exchange rates. The dollar has been on a tear following Republican Donald Trump's Nov. 8 victory over Democratic rival Hillary Clinton, tracking surging U.S. Treasury yields amid concerns government borrowing to fund possible stimulus programs could stoke inflation. Traders have seized on the tax cuts, deregulation and infrastructure spending that Trump campaigned on as negatives for bonds and positives for the dollar. "It has caused a wave of dollar buying across the board," said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago. To be sure, it remained unclear how many, if any, of the policy proposals would materialize. Trump's stance on immigration and trade, if they become law, could hurt the dollar, analysts said. "The dollar is the wild card," said Richard Bernstein, chief executive officer of Richard Bernstein Advisors LLC said at the Reuters Global Investment Outlook Summit in New York.
The dollar index, hit 101.48, its highest since early April 2003 before paring gains to 101.25, up 0.4 percent on the day. The gauge of the greenback against a basket of six major currencies was on track for a 4.2 percent two-week gain, its biggest since March 2015.While Fed Chair Janet Yellen did not explicitly say the U.S. central bank would hike rates at its Dec. 13-14 policy meeting, she told a congressional panel on Thursday that a rate increase was likely "relatively soon. “Political and economic worries abroad provided further lift for the dollar.
Euro lost against dollar even after ECB stimulus Promise.
The euro-dollar was down for a 10th consecutive session on Friday as European Central Bank (ECB) president Mario Draghi promised to maintain stimulus until it was clear that euro zone inflation was self-sustainable and while Federal Reserve (Fed) chair Janet Yellen’s revelation that the members of the American central bank generally agreed at the November 2 policy meeting that a rate hike in the U.S. would be appropriate “relatively soon” strengthened the greenback. Draghi said on Friday that the ECB would base the decision on the withdrawal of stimulus on its analysis of whether the recovery in inflation can sustain itself. "Going forward, our assessment will depend on whether we see a sustained adjustment in the path of inflation towards that objective," Draghi told the European Banking Conference in Frankfurt. "And that means that inflation convergence towards 2% is durable, even with a reduction in monetary accommodation. Inflation dynamics, in other words, need to be self-sustained," he explained, EUR/USD was last down 0.22% at 1.0600, after hitting an intraday low of 1.0582.This was its 10th consecutive session of losses, its longest stretch since its creation in 1999.Even before Draghi’s speech, the currency pair was under pressure due to the strength of the dollar after Yellen paved the way for the Fed to hike interest rates in December.
In her testimony to the U.S. Congress Joint Economic Committee on Thursday, Yellen warned of the danger of waiting too long to tighten monetary policy. Yellen referenced the November 2 Fed meeting and stated that policymakers judged back then that an increase in rates could “become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee's objectives Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals,” she warned. The greenback hit fresh 14-year highs against a basket of other currencies Friday, marking an intraday high of 101.44. That was its highest level since April 2003.
Pound trimmed gains against strong Dollar.
The pound was lower against the broadly stronger dollar on Wednesday, shrugging off a solid U.K. jobs report as investors’ reassessed prospects that the Federal Reserve would soon raise interest rates. The Office for National Statistics reported that the claimant count, which measures the number of people receiving unemployment benefit, fell by 2,400 in April, against expectations for an increase of 4,300.March’s claimant count was revised up to 14,700, the biggest monthly increase since September 2011.The U.K. unemployment rate remained stable at 5.1%, in line with economists’ forecasts. The number of people in work rose by 44,000, bringing the employment rate to a record high of 74.2%Wage growth continued to pick up, with average weekly earnings rising by 2.0% in the last three months, up from 1.9% in the three months to December.
But excluding bonuses, salaries rose by 2.1%, slowing from 2.2% the previous quarter. Demand for the dollar continued to be underpinned after data showing that U.S. consumer prices rose at the fastest rate in more than three years in April bolstered expectations for another interest rate hike later this year.
Crude Green back after 4 weeks.
Crude oil prices were headed for their first weekly gain in five on Friday buoyed by renewed hopes that OPEC might agree production cuts, but a stronger U.S. dollar capped gains. Brent crude oil futures (LCOc1) were flat at $46.49 per barrel at 1101 GMT. U.S. West Texas Intermediate (WTI) crude oil futures (CLc1) were down 7 cents at $45.35 a barrel and were on track for a their first weekly gain in four. OPEC member countries have proposed Iran cap its oil output at 3.92 million barrels per day (bpd) under a production-limiting deal for the whole group, a source familiar with the proposal has told Reuters. While Iran has not yet responded to the proposal, it means OPEC members may be coming nearer to a consensus on how much Iran should produce. Iran has previously sent mixed signals, saying it would accept a freeze at between 4.0 and 4.2 million bpd. Russian Energy Minister Alexander Novak said on Friday after meeting OPEC members he was more confident an output deal could be reached between Moscow and the group to help to boost oil prices. Saudi Arabian Energy Minister Khalid Al-Falih said on Thursday he was optimistic about OPEC's deal to limit oil output and mentioned the lower end of a previously agreed production target of 32.5-33 million bpd. But analysts said there were still obstacles for the producer group to overcome before it could reach a deal. OPEC is scheduled to meet next on Nov. 30.
"Iranian and Iraqi intransigence to the proposed output cuts remains in full force while competitive pressures among OPEC members was highlighted by news that Iran displaced Saudi Arabia as the top oil supplier to India," Stephen Brennock of oil brokerage PVM said. Iran overtook Saudi Arabia as India's top oil supplier for the first time in October, shipping data showed. Iraq would have to compensate international oil companies for limits placed on their production, further reducing the prospect it would join any OPEC deal to curb the group's output. Jason Gammel of U.S. investment bank Jefferies said at least a 700,000 barrels-per-day (bpd) cut is needed to balance the market in the first quarter of 2017.The rise in the U.S. dollar to its highest levels since 2003 against a basket of currencies on Friday weighed on oil prices. A stronger U.S. dollar makes oil, which is priced in dollars, more expensive to buyers using other currencies.
Gold slides on Fed rate expectation.
Gold prices were hovering at a six-month low on Friday, as a broadly stronger U.S. dollar continued to dampen demand for the precious metal. On the Comex division of the New York Mercantile Exchange, gold futures for December delivery were down 1.01% at $1,204.50, the lowest since May. The December contract ended Thursday’s session 0.57% lower at $1,216.90 an ounce. Futures were likely to find support at $1,199.00 and resistance at $1,231.00, Thursday’s high.The greenback strengthened broadly after the U.S. Department of Labor said on Thursday that initial jobless claims fell by 19,000 last week to 235,000, the lowest level since 1973.Separately, the Commerce Department said housing starts surged 25% in October to hit 1.323 million units, while building permits rose 0.3% to 1.229 million units. Data also showed that U.S. consumer prices rose 0.4% in October, in line with expectations. Year-over-year, consumer prices increased by 1.6% last month, its highest reading since October 2014.The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was up 0.30% at a fresh 14-year peak of 101.30.A stronger U.S. dollar usually weighs on gold, as it dampens the metal's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies.
The upbeat data added to optimism over the strength of the U.S. economy and also fueled further expectations for a rate hike at the Fed’s policy meeting next month. Earlier Thursday, Fed Chair Janet Yellen warned Congress of the danger of waiting too long to tighten monetary policy and that a rate hike was likely "relatively soon. "The comments came a day after Philadelphia Fed head Patrick Harker said that he was in favor of raising interest rates, while Cleveland Fed President Loretta Mester said the Fed must not overreact to market moves following the shock result of the presidential election. The precious metal is sensitive to moves in U.S. rates, which lift the opportunity cost of holding non-yielding assets such as bullion, while boosting the dollar in which it is priced.
U.S. stocks and S&P 500 in flat trade.
It was flat week for U.S. equities. Starting with the U.S. stocks; Dow Jones Lost 9 points and 0.15%. Nasdaq Composite gain 1.89% and 101 point. S&P 500 gain 15 points and 0.39% for the week.
Coming to European counterparts, UK’s FTSE 100 lost 26 point and 0.38%. German DAX 30 also lost 118 points and 1.01%. Additionally French CAC 40 lost 42 points and 0.93% on the weekly basis.
In commodities Gold lost $19 and 1.57% while Crude Oil added $3.13 and 6.75% over the week.
Euro lost 0.53% over the week while Yen gain 4.04 %. Pound fell 1.67% and dollar index also gain 2.28% on this week.
Note: Here all the currencies are measured in percentage against the U.S. dollar.