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Fed’s Yellen Hints Rate Hike, but Stresses Patience

Market Place — Thu, 26 Feb 2015 07:00:19 +0000

The Federal Reserve could begin normalizing interest rates this year, but won’t rush to do so amid tepid wage growth and tame inflation, central bank Chairwoman Janet Yellen said on Tuesday.

Testifying before Congress, Yellen sought to lay the groundwork for how the Federal Reserve would begin raising interest rates after more than six years. She continued to stress patience in normalizing monetary policy, echoing the Federal Open Market Committee’s January rate statement.

The Federal Reserve “will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis,” Yellen told Congress on Tuesday. However, Yelllen was careful to manage expectations, stressing that the Fed’s eventual change in language would not necessarily translate into a shift in policy.

“It is important to emphasize that a modification of the forward guidance should not be read as indicating that the [Federal Reserve] will necessarily increase the target rate in a couple of meetings,” she added. “The modification should be understood as reflecting the [Federal Reserve’s] judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting,”

The data-driven Fed has relied on the economic indicators to adjust monetary policy, having closed the books on a record bond-buying program only last October. Yellen said on Tuesday that unemployment was still too high, despite acknowledging broad improvements “on many dimensions.” Unemployment edged up slightly to 5.7 percent in January as workforce participation increased. Employers added 257,000 jobs in January and have added an average of 336,000 jobs per month over the last three months.

While several Fed officials have indicated they would like to have the option to raise interest rates in June, the minutes of the January FOMC meetings revealed growing concerns about tame inflation and a volatile global economy. For its part, the Fed has remained consistent in its messaging since December, when it first started using the word patience to describe interest rate adjustments.

The FOMC’s next meetings will be held in Washington on March 17-18. They will be accompanied by revised GDP, inflation and employment forecasts, as well as the closely followed “dot-plot” chart of interest rate expectations. The Fed’s December forecast showed policymakers anticipated interest rates to rise to 1.125 percent by the end of the year.

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Bank of England Votes Unanimously to Keeping Interest Rates Low

Market Place — Thu, 19 Feb 2015 14:00:12 +0000

Lawmakers at the Bank of England voted unanimously to keep interest rates at a record low at this month’s policy meetings, although signs of division re-emerged about the outlook on monetary policy.

The BOE voted 9-0 in favour of keeping interest rates at a record-low of 0.5 percent and the size of the asset purchase facility at £375 billion, the minutes of the February 4-5 Committee policy meetings revealed today.

“In the light of that aim, and the Committee’s latest set of economic projections, all Committee members agreed that it was appropriate to leave the stance of monetary policy unchanged at this meeting,” the minutes revealed. “Given the outlook for inflation beyond the short term, there could well be a case for an increase in Bank Rate later this year.”

Although policymakers did not rule out a rate increase this year, one member did indicate that the Bank’s next move could be to loosen monetary policy rather than tighten it. Those sentiments were reflected last week after the BOE raised the possibility of cutting interest rates in light of plunging inflation.

BOE Governor Mark Carney expects inflation to fall below zero in the short term before rebounding in the next two years. Britain’s annual inflation rate fell to 0.3 percent in January, the lowest level since record keeping began in 1989, stemming from lower gasoline and food prices. This is a welcome sign for cash-strapped consumers, who have struggled with stubbornly low earnings growth for much of the recovery.

Signs of wage growth have reappeared in recent months. Average earnings including bonus rose 2.1 percent annually in the three months through December, outstripping inflation by the widest margin since 2008, the Office for National Statistics reported today. Economists forecast an increase of 1.7 percent after wage growth averaged 1.8 percent in the three months through November.

Excluding bonuses, average earnings rose 1.7 percent annually between October and December, slightly below November’s 1.7 percent pace.

The UK labour market continued to improve at the end of last year, with the unemployment rate falling from 5.8 percent to 5.7 percent in the three months through December. Jobless benefits, which are a narrower measure of unemployment, declined by 38,600 to 823,000 in January, compared to a median estimate calling for a 25,000 drop.

The BOE expects unemployment to fall further over the forecast period, as the labour market gradually returns to full capacity.

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USD/CAD Loses NFP-Inspired Rally amid Higher Energy Prices

Market Place — Wed, 11 Feb 2015 07:00:48 +0000

The North American currency pair back was on its heels Monday, as rebounding energy prices and better than expected Canadian housing starts supported the Canadian dollar.

The USD/CAD declined more than half a percent to 1.2454. Initial support is likely found at 1.2417 and resistance at 1.2589.

The pair rebounded on Friday after the United States Department of Labor said nonfarm payrolls rose by 257,000 in January, following upwardly revised gains of 429,000 and 329,000 in November and December, respectively. The unemployment rate edged up slightly to 5.7 percent from 5.6 percent as more people entered the workforce, while average earnings rose at the fastest rate in six years.

The stronger than forecast report sent the US dollar surging and supported expectations the Federal Reserve could signal for higher interest rates by midyear. Speculation about a midyear rate hike had cooled in recent months amid sluggish domestic growth and global volatility.

The loonie received a boost on Monday after the Canadian Mortgage and Housing Corporation reported stronger than forecast housing starts in January. Canadian housing starts rose to a seasonally adjusted annual rate of 187,300 in January, up from 177,600 in December and compared with expectations for 177,500.

Rebounding energy prices also helped shore up the Canadian dollar. Crude prices advanced for a third day, as West Texas Intermediate for March delivery rose $1.46 to $53.15 a barrel. Global benchmark Brent crude jumped 43 cents to $58.23 a barrel.

The USD/CAD faces further upside in the short- and medium-terms, as the market continue to price in a much lower Canadian dollar. The loonie’s prospects have been shattered over the last seven months, in part by declining commodity prices but also because of a weaker domestic economy. Canada’s gross domestic product is expected to increase just 1.5 percent in the year through June, according to the Bank of Canada’s said last month. That’s nearly 1 full percentage point below the Bank’s previous forecast.

The BOC joined a growing list of central banks to cut interest rates in January. The Bank reduced its target for the overnight rate by 25 basis points to 0.75 percent. That was the first rate adjustment since September 2010. According to analysts, the BOC could slash interest rates by another 25 basis points by midyear to cope with weak energy prices and deflationary pressures.

Canadian consumer prices declined 0.7 percent in January, as annual inflation slowed to 1.5 percent from 2 percent.

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Canadian dollar rebounds sharply as oil prices rise

Market Place — Fri, 06 Feb 2015 07:00:18 +0000

The Canadian dollar advanced on Monday as oil prices continued to rally, while US consumer spending declined at the sharpest rate since 2009 and manufacturing activity softened.

The loonie, as the Canadian dollar is known, rose 0.8 percent to 0.7941 US, erasing Friday’s losses. The USD/CAD exchange rate tumbled more than 100 pips to 1.2590. The pair faces initial support at 1.2510 and resistance at 1.2805.

Canada’s currency has declined for ten consecutive weeks against the US dollar, as plunging oil prices and weak fundamentals have weighed on the commodity-sensitive currency. The loonie faced renewed selling pressure two weeks ago when the Bank of Canada unexpectedly reduced its trend-setting interest rate to 0.75 percent and downgraded its economic outlook.

Rising oil prices helped lift the Canadian dollar on Monday. West Texas Intermediate for March delivery rose 1.6 percent to $49.01 a barrel. Global benchmark Brent crude rose more than 2.3 percent to $54.23 a barrel.

In economic data, Canadian manufacturing softened in January, the Royal Bank of Canada reported today. The RBC manufacturing PMI declined from 54.9 percent to 51 percent in January, as overall business conditions improved at the weakest rate since April 2013.

US manufacturing activity cooled again in January, as new orders continued to moderate, the Institute for Supply Management reported today. ISM’s monthly gauge of US manufacturing declined from 55.5 to 53.5. New export orders declined for the first time in 26 months, as only five manufacturing sub-sectors reported growth.

In a separate report the Department of Commerce said household spending declined at the sharpest rate since September 2009, a sign consumers were pinching their pennies toward the end of the holiday season. US personal spending declined 0.3 percent in December following a 0.5 percent advance the month before. However, personal incomes increased 0.3 percent. Combined with cheaper gas prices, higher incomes translated into a 4.9 percent increase in the saving rate.

Monday’s data deluge wrapped up with construction spending, a key indicator of US housing activity. Construction spending rose 0.4 percent in December, well below estimates calling for 0.7 percent. The November rate was revised up to reflect a 0.2 percent drop instead of the 0.3 percent decline reported last month.

The US government will report on factory orders on Tuesday, followed by services PMI and employment data on Wednesday. The United States and Canada will each report on international trade on Thursday.

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US dollar continues higher as Fed pledges patience toward raising interest rates

Market Place — Thu, 29 Jan 2015 07:00:22 +0000

The US dollar advanced against a basket of currencies Wednesday, as the Federal Reserve conveyed optimism that inflation would gradually reach its target in the medium-term despite pledging to be patient on raising interest rates.

The US dollar index – a weighted average of the greenback’s performance against a basket of six currencies – climbed 0.33 percent to 94.33. The index reached an intraday high of 94.46 in the hours leading up to the Federal Open Market Committee rate statement.

The Federal Reserve made no changes to monetary policy on Wednesday, pledging to remain patient about raising interest rates in the face of below-trend inflation.

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate,” the Federal Reserve outlined in its official rate statement.

The statement added, “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Policymakers are confident that inflation will gradually return to target in the medium-term as the “transitory effects” of lower energy prices and labour market underutilization diminish. Energy prices have plunged nearly 60 percent since the summer, driving down inflationary pressures throughout the advanced industrialized world. This has prompted central banks in Canada, Switzerland and Singapore, among others, to ease monetary policy to stave off deflation and promote economic growth.

The Federal Reserve has maintained rock-bottom interest rates for more than six years, having only in October ended its record bond-buying program. According to experts, the Federal Reserve could begin lifting interest rates in the second half of the year. Analysts had previously forecast a rate hike to materialize by June.

Rate-hike speculation has fueled the US dollar over the past seven months. The US dollar index is trading at 12-year highs, having gained more than 17 percent year-over-year.

The dollar was trading higher against the euro on Wednesday, as the EUR/USD declined 0.67 percent to 1.1307. The pair is likely to face initial support at 1.1277 and resistance at 1.1359.

The greenback rose more than 100 pips against its Canadian counterpart, as the USD/CAD retook the critical 1.25 level. The pair consolidated at 1.2509 in the North American session. Initial support is likely found at 1.2425 and resistance at 1.2555.

The US dollar could receive a boost at the end of the week when the Commerce Department reports on fourth quarter GDP. The US economy is forecast to rise 3.3 percent annually in the fourth quarter, following a 5 percent gain in the July to September period.

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