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Markets Await Fed Decision

Published July 27, 2016
  • Overnight market action was dominated by news of a massive US$265B stimulus package from Japanese PM Shinzo Abe in the latest attempt to reflate the sputtering Japanese economy that has been mired in decades of low growth and disinflation
  • There are reports that the Japanese government is considering 50 year bonds to fund spending – bonds that could essentially be thought of as perpetual (i.e. never repaid)…
  • …The immediate impact on the Yen was a sharp 1.8% fall against the US dollar as traders pared back JPY long positions and got into higher paying equities which have risen across the board during the Asian and European sessions
  • The North American session brings the latest interest rate decision by the US Federal Reserve at 2pm ET
  • The Fed are widely expected to hold rates; however, the statement will be parsed for clues on whether they are starting to change their tune on the broader economic outlook
  • US labour markets and inflation metrics have been performing well – better than most other developed countries – and one could argue that the Fed should start to prepare the market for a September rate hike, currently not priced in
  • Uncertainties surrounding Brexit and aggregate demand in the global economy have been cited as the primary reasons for holding off; however, we suspect that we may see a less cautious statement from the Fed this afternoon
  • Payroll data has been excellent and there has been an uptick in production data as well; all told, the Fed may be less likely to sound negative on the US dollar and the economy
  • USDCAD is flat to yesterday's closing levels as it trades either side of the 1.3200 handle with risk skewed to the topside in the near and medium term
  • Oil continues to sputter but is holding just above yesterday's multi month lows with WTI trading at $42.75

Charts:  USDCAD may test 200 DMA as WTI Oil breaks lower amid renewed short selling.