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FX Friday – Global Currency Review & Forecast for 2-12-16

U.S. Dollar and Oil Fall, Gold Gains

The U.S. Dollar Index* closed at 96.96 on February 5 2016. During the week starting Monday February 8, 2016, the Dollar Index fell steadily all week along with the U.S. equity markets. Oil also tumbled during the week and recovered late Thursday on reports that OPEC might halt production.

On Monday February 8, the Dow Jones Industrial Average tumbled 400 points before closing 176 points lower. On Tuesday, the US Dollar Index hit a four month low and the dollar hit a fifteen month low against the Japanese Yen, even though Japanese bonds yield a negative interest rate. On Tuesday, the Dollar Index slid to 95.74 in mid day trade and closed at 96.02.

Pressuring the dollar was a report from Reuters that Iran wished to be paid for its oil in Euros, rather than in U.S. Dollars.

Yellen Tesitfies to Congress

On Wednesday, Federal Reserve Chair Janet Yellen began the first of two days of testimony to the U.S. Congress and Senate. Ms. Yellen’s prepared remarks indicated that economic conditions were “less supportive of growth” but highlighted that foreign central banks’ highly accomodative monetary policies, U.S. wage growth and lower oil prices should spur consumer spending and growth. This would allow the Fed to continue to pursue a rate hike path. Ms. Yellen indicated, however, monetary policy is not set in stone.

Markets interepreted Ms. Yellen’s statement as slightly hawkish because it contained language that indicated the Fed was still of the mind that the U.S. economy could weather domestic and global market turmoil.

The US Dollar Index rose to 96.47 in late Wednesday morning trade, after Janet Yellen delivered her testimony.

Later Ms. Yellen told Congressional law makers “I don’t expect the Federal Open Market Committee is going to be soon in the situation where it is necessary to cut rates.”

Gold and Silver Soar

Wednesday evening gold and silver began to rise and by mid day Thursday had tacked on impressive gains of five (over $60 an ounce for gold) and four percent (over 80 cents an ounce for silver), respectively.

Yellen Tesitfies to the Senate

On Thursday, the US Dollar Index opened around 95.65 and fell while gold and silver rose as Yellen failed to convince markets one way or the other on the direction of Fed interest rate policy. Earlier this year the message from the Federal Reserve was that there would most likely be four interest rate hikes during 2016. Ms. Yellen’s prepared remarks and tesitmony to Congress indicated that still might be possible. On Thursday, however, Ms. Yellen noted that the next Fed move might be a rate cut if conditions warranted, which she didn’t think likely. Ms. Yellen also discussed the possiblity of the Fed instituting negative interest rates.

The US Dollar Index had been rising all through 2015 on pronouncements from Ms. Yellen and Fed officials that the US economy was strong and that the Fed would raise rates and follow through with further rate hikes. Ms. Yellen’s testimony placed that narrative in question as she talked about a possible rate cut and negative interest rates noting that “a lot has happened” since the Fed raised rates in December and that monetary policy is not on a preset course.

The Dollar Index fell to 95.46 in late morning as Ms. Yellen spoke.

Ms Yellen reiterated her belief that low oil prices were “on balance” good for U.S. consumers and denied that the Fed rate hike had anything to do with the recent stock market declines. Ms. Yellen noted that the stock markets were tranquil for a few weeks after the rate hike in December 2015 and that lower oil prices, downward movement in the Chinese Yuan and weakening global growth were weighing on U.S. equity markets.

During Ms. Yellen’s testimony the Dow fell 400 points and closed 254 points lower. Oil also continued its descent to 26.25 a barrel but bounced on Thursday after a report that OPEC might halt production.

As of Friday morning the US Dollar Index was at 95.85.

Other World Currencies

Japanese Yen

During the week the japanese stock market (Nikkei) fell over five percent on Wednesday, three percent on Thursday and another 4% on Friday. Despite the market declines the Yen held up against the dollar and reached fifteen month highs against the dollar.

Chinese Yuan

The Chinese Yuan fell to a two week low as of February 11.

Mexican Peso

The Mexican Peso fell to an all time low, even as the Mexican Central Bank sold $800 million in US dollars in an attempt to limit the peso’s fall.

Gold and Silver

Gold soared against all major currencies and was up $40 on the week against the US dollar as of Friday morning. Silver was up about $.60 an ounce.

To Watch Next Week:

Whether there is any type of oil production cut agreement(s) among oil producers.
Whether gold and silver can sustain and add to their massive gains from Thursday.
Whether the S&P 500 breaks below 1812.
Further statements from Fed officials regarding their outlook on the economy.

Reports that could impact currency movements next week:

Feb 16 8:30 AM Empire Manufacturing
Feb 16 10:00 AM NAHB Housing Market Index
Feb 16 4:00 PM Net Long-Term TIC Flows December
Feb 17 7:00 AM MBA Mortgage Index
Feb 17 8:30 AM PPI January
Feb 17 8:30 AM Core PPI
Feb 17 8:30 AM Housing Starts January
Feb 17 8:30 AM Building Permits
Feb 17 9:15 AM Industrial Production January
Feb 17 9:15 AM Capacity Utilization January
Feb 17 10:30 AM Crude Inventories 02/13
Feb 17 2:00 PM FOMC Minutes January 27, 2016 meeting
Feb 18 8:30 AM Initial Claims 02/13
Feb 18 8:30 AM Continuing Claims 02/06
Feb 18 8:30 AM Philadelphia Fed February
Feb 18 10:30 AM Natural Gas Inventories 02/13
Feb 19 8:30 AM CPI January
Feb 19 8:30 AM Core CPI

* The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.

All Blog Articles are provided by a third party and do not necessarily reflect the explicit views of BGASC, nor should they be construed as financial advice.