• Fed shifts focus
  • Diverging global markets
  • Argentina devalues peso
  • Chinese Yuan weakens

Yesterday’s Fed decision didn’t exactly rock the markets, but it did come with a bit of a twist.  As expected the Fed raised rates by 0.25% and currencies stayed pretty flat after a small initial spike of dollar strength. In Yellen’s speech later the Fed stated that they will raise rates incrementally with four 0.25% increases in 2016. This was more than the markets were expected and US dollar strengthened on this news. Those gains were solidified this morning with good initial jobless claims numbers.  It appears that the markets are ignoring most other developments in light of this as the UK had very good retail sales numbers and still weakened against the dollar.

A less flashy but very important note to come out of yesterday’s rate decision is that of divergence globally. “Divergence” refers to the US beginning a schedule of tightening while Europe continues to use easing measures and cut rates. The outcome of this contrast in monetary policy is especially apparent when looking at the spread between the yields on sovereign debt between the US and Germany, which is at its highest level in 9 years. For the time being this will only serve to strengthen the dollar further.

In other currency news Argentina’s new president followed through on one of his campaign promises and lifted some of the currency controls that they had in place. It is expected that by doing so that there will be an almost 30% devaluation of the peso. The Chinese Yuan has also continued to weaken on what appears to be a continued downward trend. This is expected to be the case into 2016 as well, and there are concerns that this signals increased overall volatility for the Asian region.

EURUSD: Euro down on US rate hike and good US data.

GBPUSD: The pound down this morning despite very good retail sales data.  USD strength overpowered the good numbers as the pound falls below 1.50.

AUDUSD: Aussie dollar down this morning on USD strength.

USDCAD: Canadian dollar weakened also on USD strength.