Market analysis: US Federal Reserve needs more to justify a rate rise

Despite the broader swings in the performance of the dollar to the end of summer, the overall ranges have held true and the dollar trend remains unchanged.

The US dollar’s overall ranges have held true and the currency’s trend remains unchanged, despite swings in its performance. Asif Hassan / AFP
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The US dollar turned in a mixed performance against its major currency counterparts in the past two weeks, and expect volatility to continue leading up to the Federal Reserve meeting later this month.

Over the course of the two weeks leading to the Labor Day weekend that ended on Monday, the greenback closed stronger against the euro (by 1.38 per cent), Swiss franc (2.02 per cent) and Japan’s yen (3.08 per cent) while ending lower against the British pound (by 1.86 per cent) and the Indian rupee (1 per cent) on the Dubai Gold & Commodities Exchange (DGCX).

In the commodities segment, gold was down by 1.17 per cent while the West Texas Intermediary crude contract closed 1.56 per cent lower.

Despite the broader swings in the performance of the dollar to the end of summer, the overall ranges have held true and the dollar trend remains unchanged. Sensitivity towards Fed speak will continue to strengthen as interest rate expectations solidify and underpin the performance of the dollar to the end of the year.

Volatility is expected to pick up leading up to the Federal Open Market Committee (FOMC) rate decision on September 21.

Markets currently are expecting a 15 per cent chance of a rate hike at this meeting, which, I think, is way too optimistic. Of late, we have noticed a hawkish Fed but overall the signals of future Fed policy have been mixed and chairwoman Janet Yellen’s lack of conviction in Jackson Hole, a the symposium that has been historically notorious for market-developing announcements, would suggest the Fed is still sticking to a wait-and-see mentality.

The economic data docket still lacks upside traction – inflation and growth data slowed in the summer and the most recent US non-farm payrolls released last week did not add to the case for a hike.

The report showed a slower than expected gain in payrolls for last month (151,000 actual vs 180,000 expected). Besides, the figure was more than 100,000 jobs short of July’s upwardly revised figure, along with an unchanged unemployment rate of 4.9 per cent.

The Fed will need a much stronger and more consistent flow of data to justify any conviction of a rate hike this year, which is why any chatter of a rate hike before December seems premature.

This timeline also works from a political standpoint. The US elections culminate in November, at which point the Fed would have all the clarity it needs from Washington to take the economy forward under the new government.

Along with the FOMC rate decision this month, a host of central banks are set to convene over the next two weeks.

The Reserve Bank of Australia held rates unchanged at 1.5 per cent earlier in the week and we can expect the Bank of Canada to follow suit by holding rates unchanged at 0.5 per cent when it announces later today.

The European Central Bank convenes tomorrow and although we do not expect any further cuts to interest rates, we keenly await president Mario Draghi’s press conference.

We will not be surprised to see an extension to the current quantitative easing programme to beyond the spring of next year.

The Bank of England is set to convene on September 15 to decide rates and we do not expect major action from the central bank as it is likely to take its cues from the Fed a week later.

And, finally, Apple is all set to announce the iPhone 7, along with a host of other products at its annual keynote event today. Its timing could not have been better – the tech major has been under the hammer recently as a result of the EU tax commission’s findings which could involve upwards of €13 billion due by Apple in back taxes.

Apple’s futures on the DGCX dropped to below US$106 following the news, which forms the support level in the stock, while upsides following optimism at the keynote could result in the stock testing $110 levels following the keynote.

Gaurav Kashyap is the head of futures at Axitrader in Dubai.

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