– The US Dollar continues to drop below support levels, and this has helped many risk assets continue rallies; but the big question is how long USD weakness might persist, and this will likely be driven by Fed rate hike expectations; which we will receive next week at the upcoming FOMC meeting.
– While markets are currently pricing-out rate hike expectations for 2016, the Fed has shown a persistent drive to try to kick rates higher, even in the face of numerous hurdles. There is likely a reason for this, and with stock prices remaining near highs, the bank may not be far away from surprising markets with a hawkish stance in next week’s economic projections.
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In yesterday’s article, we looked at the thrust lower in the US Dollar on the heels of Friday’s NFP report. On Monday, Chair Yellen spoke in Philadelphia and the takeaway was that the bank likely wouldn’t hike while questions still revolve around employment in the American economy, and this only drove the US Dollar lower. This was a stark contrast to May’s price action in USD as we saw rate expectations climb throughout the month, creating a strong rip higher in the US Dollar. But the past week has brought an out-sized reversal as this reality that markets will likely have to wait a bit longer to get another actual rate hike out of the Fed.
But the question remains: Is this a lasting move in the Greenback? As in, the Fed surely doesn’t want to hike in the face of declining data when numerous questions already exist to the strength of the American economic recovery; but there’s a reason that they’ve been driving for higher rates for over a year now while there are some very big global macro questions. China’s stock market began to implode about a year ago, and this seeped into global markets in August after the PBOC staged a stark devaluation of the Yuan. Oil prices were getting slaughtered for much of last year, and the commodity space in general was feeling a considerable amount of pain, yet the Fed continued to talk up the prospect of higher rates. These risks were clear, and the Fed surely saw them yet continued to try to drive rates higher.