The Dollar Looks to Fed Chair Yellen

The Dollar Looks to Fed Chair Yellen
by, David Frank, Economist

Points to consider in this Forex article:

• The Japanese yen falls this morning as stocks rise. The Bank of Japan comes up empty in bond-operation.
• The Australian Dollar falls as jobs data comes in weaker-than-expected. The New Zealand Dollar recovers.
• US Dollar could extend rally if Federal Reserve Chair Janet Yellen endorses a steeper rate hike outlook.

This morning, the Japanese yen underperformed against the US Dollar as most stocks on the Japanese headline stock bourse, the Nikkei 225 rose. The Nikkei gapped down at open only to retrace losses to close higher by the end of the trading session. Stocks closed flat at the end of the day. The USD/JPY Forex market paced the advance as Japan’s exporters like a weaker yen. The early selloff might have been due to the Bank of Japan missing the mark and attracting no offer in its first fixed-rate bond buying operation.

The Australian Dollar also moved lower this morning after disappointing labor market data crossed the wires. The economy in the Down Under only added a net of 9,800 jobs in October. Economists had projected a gain of 16,000. Even worse, the September loss was revised to a shockingly large 29,000 jobs lost. The initial net loss came in at 9,800. The Aussie Dollar tracked front-end bond yields lower as the results priced in a more dovish Reserve Bank of Australia monetary policy outlook.

Looking at the New Zealand Dollar, which had been under pressure since massive earthquakes jolted the country last week, recovered this morning. The government announced they were setting aside NZ$ 7.5 million in a business aid package for areas affected by the quakes. The country’s Finance Minister Bill English also announced that the earthquake will have very little impact on the country’s economic growth. The gross domestic product (GDP) will be little affected. Also a parallel increase in US 2 year Treasury bill futures hints at some protective moderation with US monetary policy outlook ahead of Fed Chair Janet Yellen’s speech. This is helping interest rate sensitive currencies like the Kiwi Dollar.

The financial markets have all but priced in the Federal Reserve hiking rates in December. Fed funds futures are implying a 95 percent possibility of them pulling the trigger. This means investors will be very meaningful as they will be glued to any comments or hints as to future trajectory. The Fed is seen as steepening its trajectory of rate hikes in the wake of President elect Donald Trump’s plan to increase fiscal spending and cut taxes. He plans to rebuild and start new infrastructure projects. This has caused a selloff in US Treasuries, pushing up yields and alongside the higher yields, the US Dollar has also soared to a near 13 and a half year high.

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