• Why rush? Rate hike could be later than expected
  • Waiting on tomorrow’s US retail sales report
  • Bond yields at record lows going lower
  • Oil continues to plunge, dragging the CAD lower

In the absence of any key data and events during the past 24 hours, the US dollar has mostly traded lower against major currencies. A call has resounded for more “patience” in raising the short term interest rates by the Fed.

The Federal Reserve is expected to raise the short term interest rate for the first time since 2006 in the coming months.  However, last Friday’s December employment report showed wages remain stagnant and oil prices continued to plunge this week. This also suggests that inflation will remain tame and the Fed should be able to maintain its current accommodating monetary stance of low interest rates much longer than what the market was expecting only a week ago.

Why rush?  That was the key message delivered by several dovish Fed policy makers since Friday.  Spotting this possible shift in the Fed policy stance, 10-year Treasury bond price rose, and the bond yield fell to almost a three-month low overnight. The tamed outlook for inflation has begun to get priced into the market.

Lower inflation depresses bond yields because borrowers do not have to offer higher yields to compensate for the loss in purchasing power of the money invested in the bonds.   However, lower yield makes dollar assets less attractive, so it tends to weaken in this situation.

So what’s next?  As mentioned yesterday, the market will be paying close attention to the release of December Retail Sales data on Wednesday to see if falling oil prices could provide a sufficient boost to demand and pull up general prices along with it – the US dollar as well.  Stay tuned.

EUR-USD drifted up towards 1.1840 overnight as the US dollar rally stalled. In addition, a German newspaper reported that the EU Commission is considering the option of reducing Greek debt burden to prevent Greece from exiting the Eurozone. This has provided short-term support for the Euro, for now.

GBP-USD bounced off the 1.5100 level and wandered higher overnight without any specific news or event driving it.  This morning, the December consumer price inflation data will be released. There is every reason to believe that global deflationary pressures have had measurable effects on UK prices.  Therefore, a lower December inflation rate could further reinforce a growing market expectation that the Bank of England will not raise the short term interest this year, and consequently pull the GBP-USD down back towards the 1.5100 level.

USD-CAD moved higher overnight in response to another plunge in oil prices and is poised to breach the 1.2000 level this week.  The market is forecasting that the Bank of Canada may be forced to cut the short term interest rate in the face of plunging oil prices, weak employment growth and deteriorating outlook for firms in the energy sector.

Have a great day!