• FOMC expects a stronger dollar but sees no drag
  • US rake hike is data dependent, likely after April
  • Deflationary concerns in the Eurozone
  • RBA to cut rates next month

The US dollar moved somewhat higher after the release of the December FOMC Minutes yesterday. The Federal Open Market Committee (FOMC) is made up of twelve representative members from the Federal Reserve System and its Reserve Banks, and the committee meets eight times per year to set the monetary policy for the country. The notes from the last meeting show that the committee expects the dollar will continue to rise this year, but a stronger dollar will not be a significant drag on the growth.

Many analysts have expressed their concerns lately that a stronger dollar will increasingly hinder exports since American made goods will become more expensive to overseas buyers. At the same time, a stronger dollar will draw in more imports, thereby lowering domestic production and holding back the current expansion. As a consequence, the FOMC would be motivated to wait on raising the short term interest rate and in turn make the dollar less appealing to international investors who are seeking higher returns.

The December FOMC Minutes made it clear that the timing of the first rate hike since 2006 was not dependent of the relative strength of the dollar but rather on the merits of incoming economic “data.” As a start, if this Friday’s December employment report beats the market expectation of 240,000 new job creation in the month then the speculation of early rate hike will build and pull the dollar higher.

jan-8 graph

EUR-USD traded to a near 9-year low after the Eurozone December inflation rate dropped -0.2 percent compared to the previous December. Although the fall in prices into a deflationary territory was mostly driven by lower energy prices, the report still makes a good case for the European Central Bank to launch an aggressive bond buying program to inject more credit into the financial system. This development could happen at their next meeting on January 22nd and will further erode the euro value.

GBP-USD continues to trend lower ahead of the Bank of England’s Monetary Policy Committee (MPC) meeting today. Recent UK economic data has been unimpressive and a rapid increase in current account deficit, mostly driven by falling exports, suggests capital is actually fleeing the UK on a net basis. Accordingly, the MPC is expected to make no interest rate changes today.

AUD-USD continues to move in sync with oil and commodity prices and is trending toward a 4-year low level. With falling exports to Asia and Europe and corresponding rising unemployment, the Reserve Bank of Australia is expected to lower its short term interest rate at their next meeting on February 3rd. Lower interest rates make the currency less valuable to its holders and therefore erodes the currency’s value in comparison to other currencies.

Today is light with economic data releases. The Bank of England’s Monetary Policy Committee will announce its monetary policy decision early this morning. Then, the past week’s US Initial Jobless Claims data will be released.