In the highly anticipated speech by Fed Chair Janet Yellen last Friday, 26th August 2016, the Euro tumbled against the Greenback (USD), posting its widest daily trading range in that week. Heralded as a must-watch-market event, many market participants were seeking for hints on when the Fed might increase rates in the coming months. Once again, markets decided to make a mountain out of a molehill with the dollar rally since an official announcement for an interest rate rise was never intended to be made. What was being officiated however was the positive improvement in the job market due to higher consumer spending contributing to the GDP growth of the economy. For reasons as such, Yellen believes that “the case for an increase in the federal funds rate has strengthened in recent months.” Evidently, markets responded based on this commentary that she made with speculations hovering around predictions that the rate hike will most likely be effected after the U.S. elections.
Since 2008, interest rates were at a near-zero level, sending the stock market rallying over the last seven years as investors are reluctant to invest in U.S. treasury bonds which yield little interest. Yet keeping interest rates at near-zero levels is often accompanied by excessive risk-taking behaviour, inducing the possibility of financial instability in the long run. Due to falling oil prices, China’s economic slowdown, volatile stock markets and Brexit witnessed this year, the Feds have pushed back their proposed plan to raise interest rates until now.
Following Yellen’s speech, Asian stocks also fell as investors worry about global growth with interest rate hikes. An exception would be Japanese shares rallying due to a weaker yen, an indication that earnings of the nation’s giant exporters are boosted. In terms of market sentiments, the odds of a Federal Reserve rate hike in September and December had jumped to 42% and 65% respectively as central bankers are expected to hold their stance.
How to trade the majors this week – Morgan Stanley (28/08/2016)
To all the forex traders out there, we believe you will be having some tough time in trading especially after Yellen’s speech last Friday. Here are some recommendations on how you might want to place your deck on the currencies this week:
(i) EUR: Since the Eurozone economy has maintained their composure well post-Brexit, there isn’t much pressure on the ECB to ease the market beyond what their target for EUR/USD is. Given the fact that Eurozone bond yields are already low or negative, there won’t be much effect on the currency if quantitative easing is to be applied. US data has been weak since July, and the pair is trading close to 1.15, supporting the notion of a bullish EUR in the upcoming week.
(ii) JPY: To much disappointment, fiscal and monetary policies have proven to be failures in containing the sporadic upward trend of JPY against USD. BOJ is expected to review its current policy in its next meeting, and we believe that JPY yields will continue to rise, strengthening the yen further. Bullish on JPY again!
(iii) GBP: Having received mixed reaction from analysts across the boards, GBP is poised to rally given strong UK economic data printed. Investors have been skeptical about post-Brexit growth and GBP short positioning sits at an all time high. Signs of weaker GBP have pushed for asset purchase. Monitor closely on this trend: Neutral
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