Dr Yellen’s Speech

News   •   Oct 19, 2016 23:36 +08

Please attribute the following commentary to Stephen Innes, senior trader at OANDA

Dr Yellen’s Speech

On the surface, Dr. Yellen’s speech could be construed that the Fed is exploring new excuses to keep interest rates lower for longer, hinting that the economy has ‘a little more room to run’ than previously thought, but it is more likely a tactic to calm markets as we draw closer to a very devise US political election.

Despite the ‘lower of longer’ rhetoric, the expected case for a December rate hike remains on course, yet given the division in the FOMC it is far from done. Although recent US economic data, specifically the employment metric, is running hot, a few bruises in the data between now and December could easily tip the apple cart.

Meanwhile the Fed's preferred measure, inflation, is gradually picking up in the US. The core PCE inflation is currently running at a tepid 1.6 percent, well below the Fed's 2 percent target. While this fact should minimal impact for a December hike, it could affect the pace of rate hikes in 2017 and beyond. The Fed’s mandate is not only to maintain full employment, but also to maintain a sustainable rate of inflation.

Japanese Yen

The Yen should continue to trade on the back of the US economic cycle with interest rates and equities the primary driver. With all the Fed verbal gymnastics in the background, it's becoming clear that the market is waiting for some constructive policy direction from the Feds. So the USDJPY may become somewhat of a sideshow in the days to come as the Fed tries to keep the market contained through moral suasion ahead of a very divisive US election.

Chinese Yuan

The Yuan faces considerable headwinds as we enter the final months of 2016. Steeper Yield Curves in the G-3 currencies will weigh on the Yuan, which could struggle against broader USD positive moves as we approach the December lift off. The China PPI reading on Friday provided a supportive lifeline to global risk, yet the weak global economic climate and abysmal Chinese trade data could continue to add to market unease. While it's unlikely, the RMB could experience a sudden bout of large depreciation. Traders are treading water with trepidation.

Malaysian Ringgit

The MYR is reeling from Bank Negara data, which showed substantial sell-off of Malaysian bonds by foreign investors in September. This week's budget could offer a lifeline by providing some additional economic boosts to the economy, however, the budget is more likely, given that there could possibly be an early 2017 election, to see Prime Minister Datuk Seri Najib Abdul Razak walk the thin line between fiscal prudence and appealing to voters. One possibility is for a reduction in Corporate Income Tax rates so as to stay in line with recently proposed cuts in both the Philippines and Indonesia, which would be perceived favourably by the markets, despite the fact CIT rates are quite moderate.


Thailand is still dealing with the distinctive storyline from the death of the highly revered King Bhumibol Adulyade. Political uncertainty is sure to pick up, as tensions could escalate between the Yellow and Red Shirts. In the meantime, the Thai market remains on solid footing and is considerably underweight from a foreign investment perspective, in both bonds and equities. If political noise can stay low, the markets should hold on to last week's rebound.

Australian Dollar

The Australian dollar remains remarkably hardy. After hitting technical support levels following last week’s weaker Chinese trade data, the high beta currencies rebounded resoundingly this despite the stronger USD. Traders pointed to both oil and commodity prices as the primary catalyst. But let's not overlook the AUD short-term interest rate curve, which is pricing a less than 50% chance of another rate cut, the lowest betting odds since May last year.

A recent commodity splurge by China, which loaded up on Coal and Iron ore despite lingering economic concerns, has likely underpinned AUD appeal.

So far in early trade, the Aussie is trading below .7600 but remains supported on dips.

The next key economic event to take place is the RBA meeting minutes on October 18, which should attract attention given that it is Governor Lowe's first meeting, but realistically it is unlikely that the RBA will detour from their ‘near neutral stance’.

The big question for the commodity basket of currencies that are trading on the heels of risk sensitivity, is will the current risk rally continue, especially in light of last week’s horrible Chinese trade data?