Liftoff Uncertainty Rises

Daily Analysis - 13/08/2015

Conflicting Comments From the Federal Reserve Underline Risks to Interest Rate Outlook

Remarks from important Federal Reserve voting members show that the outlook for monetary policy remains undecided as certain policymakers remain concerned about the potential impact from a Chinese devaluation and inflation’s failure to rebound amid the latest rout in energy prices.

Dudley Warns on Outlook

The New York Federal Reserve’s President William Dudley sent bond yields tumbling yesterday as comments about the outlook for rates mixed expectations after stronger employment data raised optimism of an imminent hike in the September meeting. After refusing to analyze the latest moves by Chinese policymakers to revalue the Yuan, in a stark reversal from his position earlier in the month, Dudley remarked that the Federal Reserve “can hopefully raise rates in near future.” The lacking confidence in his comments echoes comments from Federal Reserve Vice Chairman Stanley Fischer who highlighted other risks to the liftoff scenario, namely inflation which has failed to move back towards longer-term targets. The dollar softened further against peers during yesterday’s session before staging a rebound late in the session with momentum higher continuing overnight against the Euro and Yen.

Yuan Devalued Again

Chinese policymakers entered their third day of intervention in the Yuan, adjusting the fix even further with the Yuan touching a four-year low against the dollar. Citing the relative strength of the currency, the People’s Bank of China sought to allay concerns about the economy despite the worsening outlook. With inflation driven higher by pork prices, further stimulus measures are not considered relevant considering the potential to spur runaway inflation that damages the economy further amid the slowdown. According to the Central Bank, the “Yuan exchange rate adjustment almost completed” instills a sense that further moves to sell dollars could be repeated in coming sessions as that nation raises dollars to sell by reducing US Treasury exposure. The latest move in the escalating global currency war raises the specter of further currency devaluations across emerging markets as countries struggle to stay competitive in a challenging economic environment.

Oil Oversupply to Extend

Dragging on the Federal Reserve’s outlook has been the reversal lower in oil prices after hitting the lowest levels since 2009 in the last few sessions. Energy prices managed to stage a minor rebound after yesterday’s crude oil inventory numbers showed a smaller than expected drawdown of -1.682 million barrels. Nevertheless, according to the International Energy Agency, the persistent problems with market oversupply are forecast to extend well into 2016. US production numbers released yesterday showed that production numbers continued to fall, contracting by 0.74% last week to the lowest since May as the price war is slowly taking a toll on US shale production. However, supply still outpaces demand by approximately 3 million barrels per day according to the latest numbers, setting the stage for oil prices to drop into the high $30s as producers prepare for prices to remain depressed for longer than previously anticipated.

USDCHF Equidistant Channel Technical Pattern

After declining substantially against peers following the reduced expectations for a September interest rate hike, the dollar has managed to stage a modest reversal higher against peers, notably against the Swiss Franc. Reduced demand for safety saw haven assets retreat from earlier gains while treasuries bid higher showed a flight to quality on the part of investors following the reemergence of the slumbering global currency war. The equidistant channel pattern evident in the USDCHF has been intact for nearly two months, highlighting the continued efforts of the Swiss National Bank to prevent further speculative inflows through a combination of intervention and negative interest rates. The bullish bias in the chart formation means ideal positions taken at the lower channel line should target the upper channel line for a potential exit. However, fighting the prevailing uptrend is not suggested due to the widening reward characteristics as risk narrows.