FOMC Dismisses First Quarter Weakness

Daily Analysis - 21/05/2015

Federal Reserve Fearing the Potential Volatility of Hiking Interest Rates


Even though the Federal Reserve proved unfazed by the weakness in the first quarter GDP figures according to the latest minutes, potential rate hikes are causing concerns among members fearful of the possible volatility that will arise from such a move.

June Rate Hike Unlikely

The miserable first quarter gross domestic product print was not a primary concern amongst the Federal Open Market Committee members who were more apprehensive about the potential implications of higher rates. In the latest release of the Fed Meeting Minutes, voting members were cited as suggesting that the factors dragging on growth were merely transitory. The stronger dollar specifically was noted as a primary driver of weakness leading to concerns that any rate liftoff would actually hinder growth as it would add to momentum higher in the dollar. There is the possibility of higher rates in the pipeline at the next FOMC Meeting, but many Fed officials saw the likelihood of a June rate hike as unlikely. Equities were mostly unchanged on the news, retreating slightly from near record highs, led lower by the Dow Jones Industrial Average.


China Manufacturing Slips

China’s HSBC Flash Manufacturing PMI continued to weaken according to the latest overnight print. This marks three-straight months of sub-50 prints, indicating that a contraction in manufacturing is well underway as policymakers grapple with solutions to fix a multitude of looming problems facing the economy. In order to stimulate the economy, the People’s Bank of China has begun to implement China’s own version of quantitative easing by focusing on monetizing local government debt. This occurs by banks buying high interest loans from local municipalities and turning them around to sell to the Central Bank for long-term loans. The idea is to get the lending machine started again amid a dearth of nonperforming loans and weaker industrial growth. The overnight impact from the latest data was largely negative for the USDCNH offshore Renminbi (Yuan) pair which continues to decline despite Chinese policymakers’ strong desire to prevent Yuan appreciation.


Crude Oil in Storage Slides

For the third straight week, crude oil inventories in the United States have fallen with another 2.674 million barrel decline in crude stocks. This comes on the heels of the API numbers which showed a drawdown of 5.200 million barrels. The initial kneejerk reaction in crude oil prices was to the downside as the smaller than expected draw in comparison to the API figures even though US oil production fell by a substantial 1.20% week over week. This was the biggest drop in output recorded since last July, however, prices quickly reversed higher, reflecting the shrinking supply as demand stays relatively constant. Prices are continuing to recover from Tuesday’s rout after crossing a major technical level to the downside and highlighting the fragile nature of the price rebound. Meanwhile, the spread between Brent and WTI is slightly larger, presently at $6.10.


USDCHF Equidistant Channel

Although the dollar has managed to rebound modestly on stronger economic data, the outlook for interest rate policy still remains uncertain after conflicting FOMC messages. Although many members did not expect a June hike, they left the door open to the possibility, highlighting the potential for imminent increased volatility in currencies. The Swiss Franc safety bid continues to benefit from the perceived clouds on the horizon as investors prefer safety and paying interest over higher yielding assets. The downward trending equidistant channel pattern forming in the USCHF currency pair for over two-months highlights this very point. The bias is bearish with ideal positions opened at the upper channel line targeting the lower channel line as the trend persists. Fighting the prevailing near-term downtrend with long positions both decreases possible reward while increasing potential risk.


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