Market Overview for December, 2015

November has been a chaotic month with much unwanted market volatility. Volatility is usually necessary in Forex, but the whipsaw patterns lately have been terribly unpredictable. In this post, let’s cover the key macro-economic news events to look out for to interpret the implications for currency movements.

Tomorrow, December 2nd, at 9:00 AM (ET), the Bank of Canada will announce its decision on the target for overnight rate. A key factor raising interest rates is inflation as, after all, the interest rate is designed to keep inflation in check so that the economy experiences moderate inflation or growth. Rapid inflation or deflation is not ideal for the economy and will most definitely cripple the steady, desired economic growth. As of the moment, the Canadian inflation rate sits at 1.0%

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Canada Inflation Rate

The last inflation release was in October, 2015. If we were to look at the relative currency devaluation for the month of November, we can project an interest rate expectation for the upcoming BoC interest rate policy meeting.

 

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USDCAD October to November

Notice that there has not been much change in the value of the Canadian Dollar relative to the U.S. Dollar from the month of October to November. Speaking in terms of net exports and consumption, it would not come to a surprise if this figure was picked up slightly due to the depreciation of the Canadian Dollar. However, it is currently not expected for this to have a major impact on the inflation rate nor the interest rate decision. Current expectations is for the Bank of Canada to maintain the overnight rate at 0.5% on the slightest possibility of increase to 0.75%.

Turning over to commodities, oil is expected to take another hit with analysts even projecting a price target to the $20 mark. This comes in anticipation of theĀ Organization of Petroleum Exporting Countries (OPEC) meeting on December 4th in Vienna over talks in regards to continuing oil production decisions. Iran has already stated that it will bring up plans to expand output during this meeting. This decision may further compound the oversupply as oil, but may be necessary to secure the market share. Last year, the Saudi Kingdom proposed the idea that OPEC should keep pumping to counter a surge in U.S. shale oil and regain market share by effectively driving prices lower to the point where U.S. producers have much less incentive to keep pumping. Although U.S. production is is reducing, it is at a very slow rate not to mention having a 488 million barrels of stockpile in surplus. Currently, we expect OPEC to reach a decision to continue it’s current rate to moderately increase its production output. As these members are heavily reliant on the sale of oil for their revenues to continue its economic operations, cutting production may have severe consequences as it digs into its cash reserve. By continuing oil production, it would slowly drive out U.S. producers and regain some market share supplying a greater quantity and a lower price to recoup some losses.

Finally, December 15 marks the date for the possible rate hike decision. Yellen has been teasing the rate hike for a good part of this year already and has since pushed back the decision several times. The last significant date was probably in September, 2015. As mentioned before, the interest rate is a means of keeping inflation in check. However, the current inflation figures of the United States are anything but optimistic for a rate hike decision.

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U.S. Inflation Rate

Since the beginning of 2015, the inflation rate has slowly picked up serving as a contributing factor for the rate hike decision. However, the inflation rate looks anything but attractive if we were to look at the raw figures alone. Generally, central banks want to target a 1% to 3% inflationary range and the current U.S. inflation rate is nowhere close to that. It’s almost as if the rate hike is now an obligation ever since Yellen first hinted at the decision. Since then, the U.S. Dollar has been in a bullish trend ever since. I won’t be posting a chart of that because literally any currency pair will tell you that.

Another key factor in the rate hike decision comes from the string of strong employment figures posted. Let’s take a look at a few below.

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U.S. Unemployment Rate

First off, the U.S. unemployment rate dipped once again to a 5.0% low down from 5.1% in September. This is one figure showing the ever strong employment figure in the U.S.

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U.S. Average hourly Earnings Growth

In addition to the unemployment rate, the average hourly earnings has been rising as well. These two factors show a strong picture that the U.S. economy is good economic health as workers are employed and earning more than before.

If more workers are employed and earning more than before, this translates to greater disposable income and ultimately consumption. Consumption is a key factor for inflation. The Feds are hoping to time the rate hike just right in order to prevent an unwanted surge in the inflation rate.

However, recall one of my earlier post concerning how the employment figures are calculated. My concern was that these figures seem to ignore the participation rate. As the participation rate dips to all time lows as well, this shows a rising number of discouraged workers and so the remaining employment figures are predicted to be over-optimistic and painting a better economic picture than it actually is.

My expectations for the December 15, 2015 Fed minutes is simple. I do not see any change in the overnight rate. At most, to keep investors happy that the Feds do keep their promises, I would target any interest rate increase to the 0.1% to the 0.25% range. The inflation figure has not picked up despite the perceived “strong” employment figures. Furthermore, given that the rate hike has been teased for a good portion of this year already, I see this rate hike as more or less priced in leading to an adverse effect on the U.S. Dollar. In simple terms, it is very possible that we will see a sell-off in the U.S. Dollar as traders close out their long positions after successfully playing into the rate hike trade.

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