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Hawkish Fed and Weaker Oil Underpin USD

Published August 22, 2016
  • Overnight market action has taken its cue from Fed Vice Chair, Stanley Fisher – a hawkish foil to the generally dovish Chair, Janet Yellen – who on Sunday said that the Fed is close to hitting its full employment and 2 percent inflation target
  • This follows similar comments from the Fed's Williams and Dudley last week and comes as the Fed prepares to meet with other Central Bankers at a monetary policy symposium this week in Jackson Hole, Wyoming
  • Yellen will be speaking on Friday in Jackson Hole and, given the recent hawkish statements from her colleagues, one would expect her to deliver a similar theme
  • However, since raising rates in December for the first time in a decade, the market has consistently called the Fed's bluff and thus it would take a remarkably poignant declaration from Yellen to shift current skeptical expectations
  • In June the Fed indicated that two rate hikes before year-end looked possible, but since then only labour market data would justify such a move and there has been little pass-through effect into wages, retail sales, wholesale trade, and inflation; this is the main reason for the market’s skepticism
  • This morning the USD is finding a bid as it continues to recover from eight week lows against multiple currencies such as the EUR, GBP and CAD 
  • USDCAD is trying to retake the 1.29 handle and is near important retracement targets calculated from the 1.32 – 1.2765 slide that ended on Thursday
  • 1.2931 is the 38.2% retrace of that move lower and a break above that level today would likely reignite interest from US dollar bulls
  • WTI crude is also at a turning point this morning and it looks as though the 12 day 24% rise has come to an end
  • Oil prices are off by 2% this morning; this may have been precipitated by a rise in US rig counts last week which indicated more supply is going to be hitting the market soon
  • 76 rigs have been added since July 1st across US formations and this should begin to reflect in US output over the coming month; higher production has usually resulted in lower prices recently so this is an important development for USDCAD traders to monitor

Charts: (1) USDCAD back to range trading as uptrend broken – need to get above 1.2930 short term and 1.3000 medium term for bulls to take over.  (2) Oil rally taking a breather.  (3) US rig count starting to rise.  (4) Economic Calendar.