US Federal Reserve Interest Rate Talk Again...

Honestly, after last week’s anticlimactic FOMC decision we thought
that we would get off this topic of interest rate hikes and move on to
other market drivers. Unfortunately, we demur as the issue has
come back, front and center, and is vying for top spot in the news
cycle along with the VW’s exhaust issues (food for thought: Chinese,
Indian or Korean automaker to buy Porsche from VW?). The USD was
able to pick itself up off the mat and finish at the top of the currency
heap last week. The week prior, the USD was down and out due to
the market’s perception of a dovish hold after the FOMC meeting.
Sound bites from several Fed officials and a speech by Chairperson
Yellen were able to transform the market’s perception from a dovish
hold to a hawkish hold. This policy stance is grounded in the fact that
most Committee members continue to project a policy rate increase
later this year, even though the conditions that led to a delay in a
September rate hike are likely to persist in the months ahead. Thus,
as long as U.S. policy normalisation remains on the table, the
divergence between the Fed and the continued monetary easing of
other central banks, especially the ECB and the BOJ, should continue
to cause the USD to trade with a strengthening bias.

The worst performers last week were the GBP and AUD. The GBP has
plainly run out of gas. The Bank of England is the only other central
bank besides the US Federal Reserve that is close to raising interest rates. There
wasn’t any key market moving data releases last week but there was
conflicting central bank commentary. Sir Jon Cunliffe asserted that
the UK’s economic outlook was ‘pretty strong’ and that the next interest rate related movement was likely to be an increase, however, fellow Monetary Policy Committee member Ben Broadbent stated that he wouldn’t be voting for higher borrowing costs anytime soon. Since the UK economy appears to have slowed in Q3, Broadbent’s comments carried more weight and helped the GBP fall by 2.5% last week. The focus for next week will be revisions to Q3 GDP and the PMI manufacturing report.
The other poor performer last week was the AUD. The AUD dropped below 70 cents intraday last week and is down about 20% over the last year primarily due to the China slowdown story and the slump in commodity prices. China is Australia’s biggest trading partner so any negative news about China’s economy tends to weigh on the AUD. Last week’s negative China news was the Caixin PMI, which showed that manufacturing activity contracting at the fastest pace since March 2009. The other driver of Aussie weakness last week was a report by ANZ Bank that suggested that the Reserve Bank of Australia may cut rates twice in 2016 taking the benchmark rate to 1.50%. If this were to happen, the next likely target on the monthly price chart would be around the 0.60 level last seen in late 2008.