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FX Friday – Global Currency Review & Forecast for 3-18-16

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Big Week For Oil, Precious Metals; Bad Week For the Dollar

The week’s economic news was dominated by the Federal Reserve’s announcement that it would not raise interest rates at its March meeting. A rate hike was not expected, but the Fed surprised Wall Street by noting it was no longer considering four rate hikes during 2016. This took some market participants off guard as the expectation set by the Fed was for four interest rate hikes in 2016.

Last week, the European Central Bank announced more stimulus and further rate cuts. The ECB action took some pressure off the Fed to raise rates and also planted in many observers’ minds that perhaps the global economy still needs emergency measures or at a minimum a hold on raising interest rates.

During the week, the Bank of Japan, Bank of England and the Swiss National Bank all left their key interest rates alone and the Norwegian Central Bank announced a rate cut (see below).

The Fed announcement caused an immediate decline in the Dollar Index* and a rise in gold, silver and oil. The price of oil had been rising all week on more talks of more talks of a production freeze among oil producers. Oil finished the week at its high of 2016 over $40 a barrel.

Here is a recap of recent market activity:

Week Ended March 11, 2016

The U.S. Dollar Index closed the week ended March 11, 2016, at 96.20 down from 97.22 on March 4, 2016.

Oil closed the week ended March 11, 2016 at $38.49 up from $36.33 on March 4.

Gold finished the week at $1250.10 an ounce on the week down from $1259.10 the prior week and silver closed the week at $15.47 down from $15.51 the prior week.

Week Ended March 18, 2016

On Monday, the dollar and gold opened higher. The Dollar Index was at 96.52 in early morning trade, gold up $3 to $1253, silver up $.07 at $15.57 and oil up down at $37.51 a barrel.

As investors looked forward to Wednesday’s Fed rate decision, the dollar rose and the Euro fell.

The Swiss Franc weakened despite Euro stimulus.

Even though Saudi oil production in February was steady, oil fell as Iranians balked at output freeze.

The Kazak central bank announced that it would keep its interet rate unchanged to support the Tenge.

Egypt devalued the pound by 13% and adopted a flexible exchange rate.

Gold closed down $15 at $1235 an ounce and silver was down $.022 at $15.33.

Most currencies fell against the dollar, although the Rouble rose on an announcement that Russia planned to pull troops from Syria.

The Dollar Index fell to 96.61 and and crude oil fell to $37.15 a barrel.

On Tuesday gold opened at $1231 an ounce and silver at $15.25. Equities also opened lower. The Dollar Index opened higher at 96.70 and oil fell to $35.23 down over 2%.

U.S. Economic Data before the Fed

The Empire State Index surprised at 0.6 vs. a prior reading of -16.6.

February retail sales fell -0.1% vs. an expected -0.2%. Retail sales excluding autos and gas were up 0.3% vs. expectations of 0.2%. While the sales beat expectations the prior month sales were revised down from 0.2% to -04% and retail sales excluding autos and gas were revised down from 0.1% to -0.4%.

Producer prices fell 0.2% in February and are at the same level as a year ago.

The chance of a British rate cut were said to be increasing as the threat of Brexit looms. The next expected move for British interest rates had been a rate increase.

The Bank of Japan held off on further rate cuts and stimulus. The BOJ announced that it was keeping its benchmark rate at -0.1%.

The Dollar Index rose slightly during the day to 96.69 but fell against the Japanese Yen.

The Russian Rouble fell 1.5% after the boost it got from its announcement of the withdrawals of troops from Syria. The rouble is up over 8% vs. the dollar this month.

Gold closed down slightly at $1232 an ounce, silver at 15.25 on ounce. The Dollar Index closed up at 96.65 and oil down at $36.43 a barrel.

On Wednesday the Dollar Index opened higher and rose on the release of the inflation data to 96.91, oil opened higher over $37 a barrel and sold off slightly in morning trade to $36.87. Gold and silver traded in a tight range before and after the release of the inflation data. Gold traded around $1230 and Silver around $15.25 an ounce.

Ahead of the Fed meeting announcement the core consumer price index was released and showed the most inflation growth since October 2008.

The February consumer price index (CPI) fell to -0.2% vs. expectations of -0.2%. But, Core CPI was up 0.3% vs. expecations of +0.2%, following a reading of 0.3% in January. Housing Starts were up to 1,178K vs. 1,120K the prior month but, housing permits fell to 1,167K from 1,204K in January. Industrial production fell to -0.5% vs. expectations of -0.3%.

Fed Meeting

Fed announced its rate hike decision– no rates hike and a cut in its projection of four rate hikes in 2016, to just two. Gold immediately tacked on $20 to $1248 an ounce, silver $.20 to 15.45 and the Dollar Index fell to 96.04.

Gold closed up $30 to $1260 Silver up $.25 to $15.50 up. Oil closed up at $38.47 on more talks of talks of price freezes by OPEX and other oil producing nations.

The Dollar Index continued to fall and hit 95.90 by the end of the day.

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On Thursday gold and silver continued their rallies with gold up another $10 and silver up $.25 in early morning trade. Gold sold off most of its gains by late morning but silver powered higher adding a few more cents an ounce. The Dollar Index opened about another dollar lower at 94.83 and oil added a dollar a barrel to $39.45.

The Yuan moved higher on dollar weakness. The Yuan added .05% today vs. the dollar and is at its highest level of the year.

Norway cut interest rates and the Swiss left theirs unchanged.

The Bank of England announced that it was leaving its interest rate at 0.5%

There were a few minor US economic releases. The February Philadelphia Fed reading came in at 12.4 vs. expectations of -1.5 vs. a reading of -2.8 in January. The weekly initial jobless claims number came in at 265,0000 vs. expectations of 268,0000. Neither report had much of an influence of the markets that were focused on yesterday’s surprise Fed announcement. Equity markets rallied and the Dow, S& P and Nasdaq all ended in the green.

Oil broke the $40 a barrel price barrier.

Gold sold off in the afternoon and closed down, while silver held its morning gains and closed at $15.90 an ounce. onon gold

On Friday markets continued to digest the impact of a more gradual Fed rate hike path. Silver and gold rose more than 1% each in over night trade but sold off before the U.S. equity markets opened.

Housing had been considered one of the bright spots of the U.S. econony, but existing and new home sales have slowed in recent months. The Fed has not mentioned housing as one of the areas that it might be taking its cues in determnining whether to raise interest rates. Rather, the Fed has focused on inflation readings and expectation, the job market and global economic conditions. Extremely strong or weak housing reports next week may cause the real estate market to re-enter the Fed’s deliberations on the direction of interest rates.

Chatter from Fed officials today and next week may also help form interest rate expectations for the next Fed meeting.

Reports that could impact currency movements next week:

Mar 21 10:00 AM Existing Home Sales Feb
Mar 22 9:00 AM FHFA Housing Price Index Jan
Mar 23 7:00 AM MBA Mortgage Index 03/19
Mar 23 10:00 AM New Home Sales Feb
Mar 23 10:30 AM Crude Inventories
Mar 24 8:30 AM Initial Claims 03/19
Mar 24 8:30 AM Continuing Claims 03/12
Mar 24 8:30 AM Durable Orders Feb
Mar 24 10:30 AM Natural Gas Inventories 03/19
Mar 25 8:30 AM GDP – Third Estimate Q4
Mar 25 8:30 AM GDP Deflator – Third Estimate Q4

Year to Date Dollar Index, Oil and Gold Prices

bgasc year to date gold dollar and oil chart 3-18-16

* 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.

This article does not necessarily reflect the explicit views of BGASC, nor should it be construed as financial advice.