Dollar weakens as Janet Yellen outlines Fed’s gradual approach to rate hikes

Weekly Report - 03/04/2016

Dollar weakens as Janet Yellen outlines Fed’s gradual approach to rate hikes


Despite better than expected ISM manufacturing and broadly positive print to March jobs report, the US dollar closed the week on a bearish note following comments from Fed chairwoman, Janet Yellen.

Janet Yellen's comments this week concerning inflation and the resulting cautious approach to rate hikes sent the dollar strongly lower reversing the gains from the previous week's hawkish speeches by Fed officials. Even the better than expected ISM manufacturing print failed to help support the Greenback.

Weekly Review

The US Dollar saw a bearish week with the help of Fed chairwoman Janet Yellen's dovish speech at the Economic Club of New York on Tuesday. With inflation being the biggest concern, Ms. Yellen said that further evidence was needed to gain confidence that inflation was rising. Suggesting that the Fed will take a cautious approach to the rate hikes, the Greenback fell strongly during the week while sending EURUSD to a 5-month high and AUDUSD to a 9-month high. Gold prices failed to capitalize on the gains despite posting rally of over 1.0% on Tuesday. By Friday, the much awaited nonfarm payrolls report saw the US unemployment rate rise back to 5.0% but with a 63.0% labor force participation rate in March, higher than February's 62.90%. Average hourly earnings also picked up steam, rising 0.30% and beating forecasts of 0.20%. ISM manufacturing was also robust, rising to 51.8 for the first time since October 2015 and showing that the US manufacturing sector was starting to see an expansion.

Last week also saw the GDP reports being released from Canada and the UK. Canadian monthly GDP in January increased 0.60%, beating forecasts of 0.30% by a strong margin. On an annualized basis, Canadian GDP grew at a pace of 1.50%, up from a revised 0.60% GDP growth rate in December of 2015. In the UK, GDP numbers were also positive and surprising. In the third and final revision, UK's economy expanded at a pace of 0.60%, up from 0.50% estimated previously. However, the UK’s current account deficit reached a record high of 7% of GDP.

In Japan, the alarm bells are ringing as Friday’s Tankan manufacturing and non-manufacturing surveys showed that business optimism was dropping. The week saw broadly gloomy data from Japan as retail sales fell 2.30% in February and industrial production fell 6.20% in the month, one of the largest declines since 2011. The BoJ is due to meet later this month where expectations for further expansion to the monetary base are high.


The Week Ahead

The week ahead will see the Reserve Bank of Australia taking center stage. While no changes to interest rates are expected, currently at 2.0%, the markets are cautious as the RBA could jawbone the Australian dollar which has posted steady gains in the first quarter. However, the monetary policy statement is likely to remain neutral as far as the economic outlook is concerned. Building permits and retail sales from Australia are also due over the week with positive expectations. The week ahead will also see speeches from Mario Draghi and Janet Yellen which could potentially be another market mover in light of the euro's appreciation against the dollar and the development from US labor markets in March which saw an increase in the average earnings as well as the participation rate.

Canada's labor market data is due on Friday with expectations that the Canadian unemployment rate remained steady at 7.30% in March following a steady increase in the print. On the net employment change, the Canadian economy is expected to have added 15.3K jobs in March following a contraction of 2.3K jobs in February.


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