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Fed Sounds Upbeat, Is The Market Still Calling A Bluff?
Published July 28, 2016
Overnight market action has been muted across the equity space despite weakness in the US dollar and a slight bid across industrial commodities; oil and copper both trading higher
The Canadian dollar is also doing rather well as USDCAD takes a breather following steady gains since mid July – USDCAD is back into the mid 1.3100's this morning
Yesterday's Fed decision was close to as expected with rates left on hold and a nod given to the improving US economy
The Fed indicated that near term risks to the economy have diminished, reflecting the improving economic data of late; however, they stopped short of saying that the economic outlook is "nearly balanced", a phrase used in the past as a prelude to rate hikes
Committee members seemed pleased with labour market developments and noted that consumer spending was improving but that business spending was lagging somewhat
The overall tone of the message was rather positive and certainly makes September a "live" meeting for potential rate hikes
Goldman Sachs have the odds for a hike before year end at 70%, and odds of a September hike at 30% from 25% previously
The market is only pricing in an 18% chance of a September hike – it seems they are still calling the Fed's bluff…
…as such the pain trade will certainly be a stronger USD and higher treasury yields as the market seems to be vastly under-pricing the possibility of a rate hike at present and will have to get on board quickly if interest rate expectations start to change
Yesterday also gave us EIA oil inventory data for last week which showed a surprise build in crude stocks, going against market expectations for a draw and compounding already heightened bearish sentiment
Crude inventories rose 1.67M barrels to July 22nd and gasoline inventories grew 452K.
Refinery utilization decreased last week and crude runs fell
Oil traded to a low of $41.62 on the news but has recovered slightly to regain the $42 handle this morning
The re-balancing of oil fundamentals remains fragile and, at present, risks are skewed to the downside for both oil and CAD
GDP for Canada and the US are due Friday, so we could see some strong moves in USDCAD to close out the week
Charts: USDCAD may test 200 DMA as WTI Oil breaks lower.