Yellen Hints Rate Hike Around the Corner

Daily Analysis - 16/07/2015

Federal Reserve Chairwoman Janet Yellen Highlighted

In her semiannual testimony prepared for Congress Federal Reserve Chair Yellen discussed the outlook for the economy and monetary policy while responding to questions about the veracity of policy and the implications of recent disclosures and leaks from the Central Bank.

A Gradual Path for Rates

In what was viewed as tacit support for near-term rate hikes, Janet Yellen revealed that the Federal Reserve intends to raise interest rates at a gradual pace in deference to the growing chorus of calls, notably from the IMF, to hold off on more hawkish policies. However, policymakers are wary of holding off, as it may necessitate a quicker adjustment higher to policies, a situation the Federal Reserve would prefer to avoid especially after witnessing the impact of quick adjustments in China. Nevertheless, the market reaction to the comments was anything but smooth as evidenced by the losses in equities and commodities while bonds and the dollar were heavily bid. This raises the stakes for a September hike amid an uptick in volatility and likelihood that economic data will continue to prove mixed as the Fed carefully eyes the inflationary outlook. Gold continued to retreat, trending back below $1150 on the back of dollar strength.

Bank of Canada Surprises

In an announcement that was largely expected to be a snoozer, the Bank of Canada stunned markets with another rate cut, dropping the benchmark interest rate 25 basis points to 0.50%. The Bank of Canada cited the worsening economic trajectory as the impetus for the move to adjust monetary policy after real GDP is projected to have shrunk in the first half of the year. The drop in investment, particularly in the energy sector coupled with exports of non-energy commodities and non-commodities was cited as another catalyst for further monetary accommodation. The Central Bank has reduced growth estimates for fiscal 2015, revising expectations for annual growth to 1% for the year and 2.50% for 2016 and 2017. Moreover, the risk of creeping deflation has forced policymakers to react in an effort to reduce disinflation mainly attributable to the softness in energy prices. USDCAD hit multi-year highs on the announcement, hitting 1.2958 before retreating modestly.

Greece Bailout Vote Passes

Despite the obvious difficulty in mustering support for another bailout and subsequent round of austerity, Alexis Tsipras managed to rally Greek Parliament in favor of the latest deal ironed out with the Eurogroup. Just outside, protestors clashed with police, throwing Molotov cocktails and rioting after politicians backtracked on promises to end austerity and fight against more measures detrimental to the economic outlook. Alexis Tsipras has divided his party and more importantly the Greek people after agreeing to the measures. Now the ball is in the court of European parliaments as the bailout talks are set to restart, setting the stage for disbursement of capital that will enable Greek banks to reopen after nearly two weeks of closure. With a looming EUR 7 billion payment due Monday, a lack of bridge financing threatens a potential default. The Euro has not reacted favorably, falling below the key 1.1000 level as anxiety grows.

Coffee Equidistant Channel Technical Pattern

Despite coffee futures hitting the lowest level since January 2014, prices have rebounded temporarily on a stabilization of South American currencies even though the crop outlook is very solid considering the rain patterns from the El Nino weather patterns. Even though prices managed to bounce from lows, the outlook for the commodity remains to the downside with an equidistant channel technical pattern forming in coffee prices. The pattern exhibits a strong bearish bias with ideal positions taken near the upper channel line targeting the lower channel line. However, should yields miss expectations and see supply levels fall, the recent rout in prices could reverse, with a move above the upper channel line indicative of a channel-based breakout.