Yellen Reiterates 2015 Rate Hike

Daily Analysis - 25/09/2015

US Dollar Gains As Yellen Highlights Seriousness of 2015 Liftoff


Speaking at the University of Masschusetts late yesterday, Federal Reserve Chairwoman Janet Yellen remarked that monetary policy conditions are likely to entail an initial rate hike in 2015 followed by a gradual tightening cycle next year. More importantly, she noted that inflation expectations form the basis for actual inflation in the long term.

Norges Bank Cuts Rates

Falling oil prices have led the Norwegian Central bank to cut the benchmark interest rates by 25 bps, bringing down the Norges Bank key lending rate to 0.75%, from 1.00% previously. The rate cut yesterday was a surprise as most economists polled expected the Norges Bank to hold rates steady. In its press conference, the Central Bank took a dovish stand as it signaled further rate cuts with a 25% probability of another rate cut by December 2015 followed by another interest rate cut by end of the second quarter of 2016. The dovish stance comes as lower crude oil prices have led to a decline in oil investments which could rollover into the broader Norwegian economy. The Krone reacted strongly to the dovish move with EURNOK rallying strongly on an already firm Euro. EURNOK gained as much as 2.37% for the day, posting a 28-day high of 9.4826.


Weak Durable Goods Orders

The monthly durable goods orders released yesterday showed a weak print, as the headline durable goods orders fell -2.00% along with previous month being revised lower to 1.90% from 2.00% earlier. On the data front, the durable goods for the current month looks to be positive as Boeing clinched big deals with China and India. However, due to the decline this month, the Atlanta Fed's GDPNow model, which tracks the quarterly GDP performance in real time ticked lower to 1.40%, posting a lower pace of growth. On the other hand, US monthly new home sales grew at a strong pace of 5.70%, beating market estimates of 1.60%. New home sales from the month before was also revised higher to 12.00% from 5.40%. The Japanese Yen continued to hold ground against the Greenback but trading remains heavily range bound for the moment.


Kiwi Dollar Surprises

The New Zealand Dollar has continued to strengthen ,carrying over momentum that began earlier during yesterday’s session. The Kiwi dollar surged initially, supported in large part by Fonterra's upgraded milk payout forecast to $4.60 from the earlier estimates of $3.85 per kilogram of milk solids. The upward revision, although on the headline positive for the Kiwi, was in fact lower compared to the previous 2014 payouts of $8.40. The NZDUSD currency pair, which has been trading near multi-year lows, managed to bounce on the news but remained subdued as the country's trade balance fell more than expected to a seasonally adjusted -1.035 billion from -0.649 billion in the prior reporting period. The currency however managed to pick up steam after the Greenback paused its three day winning streak. For the day, NZDUSD gained 1.25% to close yesterday at 0.6350.


US Final GDP Due

The third and final revision for the second quarter GDP number in the US is due at 13:30 GMT today. Expectations are for the GDP print to remain unchanged at 3.70%, including the GDP price index at 2.10% forecast to stay unchanged. Confirmation of 3.70% expansion would keep this trend intact and would offer support for FOMC hawks by verifying that the US economy was ready to digest a rate hike cycle. Federal Reserve Chair Janet Yellen gave a speech yesterday at the University of Masschusetts titled, "Inflation Dynamics and Monetary Policy". In her speech, Ms. Yellen reiterated that the first rate hike would come before the end of the year following a gradual tightening cycle of interest rates. After her speech, EURUSD posted strong declines as the single currency tumbled to current levels near 1.1176.


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