Dollar Weakens as Market Braces for Key Policy Decisions

Benchmark Treasury 10-year yields rose to 1.71% over U.S. rate hike probability

The U.S. dollar fell against a basket of major currencies, while 10-year Treasury yields rose two basis points as investors braced for key policy decisions in the U.S. and Japan. In her speech to central bankers and economists at Jackson Hole, Wyoming, on August 26th, 2016, Federal Reserve Chairperson Janet Yellen had said that the continued solid performance of the labor market has strengthened the probability of a U.S. rate hike in the coming months. The Federal Open Market Committee (FOMC) is scheduled to meet on September 20-21st, 2016 to discuss these issues and provide guidance on the interest rate policy in the near term. Economists are also awaiting updates on whether the Bank of Japan (BOJ) will boost stimulus, as reported by Bloomberg on September 19th, 2016.

The U.S. financial market has been witnessing increased volatility over the past two weeks as policy makers contemplated the limits of measures they have been using to support economic growth. Since boosting benchmark rates in December 2015, the Fed has refrained from a subsequent hike amid mixed global economic data. Traders now see only 20% odds of action on September 21st, 2016, down from more than 40% in late August 2016. Meanwhile, the BOJ and the European Central Bank are studying the effectiveness of their own stimulus programs.

The Fed will consider housing starts data for August 2016 before unveiling its decision. While the cost of living rose more than expected in August 2016 than what economists had earlier projected, consumer confidence in September 2016 plunged to the lowest level since April 2016. On the other hand, confidence among homebuilders rose to an 11-month high in September 2016, according to government data.

Dollar weakness to continue

Source: CFTC, Bloomberg
Source: CFTC, Bloomberg

The greenback weakened 0.2% to $1.1175 per euro and fell 0.4% to 101.93 yen on September 19th, 2016. Hedge funds and other large speculators cut net bullish futures positions on the dollar for the week ended September 13th, 2016, according to data from the Commodity Futures Trading Commission (CFTC). Bets that the dollar would rise outnumbered bearish positions by 113,195 contracts, down from 119,066 in the previous period. The dollar’s weakness versus G-10 and emerging-market currencies is expected to continue in the near term. d2

Treasuries

Benchmark Treasury 10-year yields rose to 1.71%, gaining two basis points since last week. Traders have been selling debt over the past month in a similar selloff seen in 2013, when investors speculated that the Fed would reduce its asset purchases.

Meanwhile, with the decline in the dollar, investors channeled investments into crude oil and gold. West Texas Intermediate crude for October delivery, a contract that expires Tuesday, September 20th, 2016, climbed 0.6% to close at $43.30 a barrel on the New York Mercantile Exchange. The more-active November contract rose to $43.86. Overall, oil retreated from the day’s highs on speculation that the Organization of Petroleum Exporting Countries (OPEC) may call an extraordinary meeting if members reach consensus on oil markets at an informal gathering next week in Algiers to be held September 27th, 2016, on the sidelines of a conference of the International Energy Forum. OPEC is close to reaching an agreement with producers outside the group on how to stabilize the market and eliminate the global oil glut, where markets continue to struggle with excess supply and crude remains capped below $50 a barrel.

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Gold futures for December delivery gained 0.6% to settle at $1,317.80 an ounce on the Comex in New York, their biggest gain since September 6th, 2016. Aggregate futures trading were 38% below the 100-day average for this time.

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Among industrial metals, nickel jumped 4.4%, the most for two months, after the Philippines said that it may suspend production at some more nickel mines as part of a nationwide audit due for release this week.

Source: LME
Source: LME

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