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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.