Monday 26 September 2016

Daily Market Update: US Dollar climbs toward 7-month highs

John Barry

Published 11/11/2015 | 10:16

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The dollar moved towards a seven-month high against a basket of major currencies, as the market anticipates whether the Fed will raise rates at its December meeting.

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Many analysts note that a widening of the spread between US 10 year Treasuries and German Bunds, currently at 167 basis points, may underpin the dollar and keep the euro on the defensive. The single currency had come under pressure on Monday after four governing council members indicated that the European Central Bank may take one of its benchmark interest rates further into negative territory next month.

In the UK, David Cameron announced in a speech yesterday four key demands contained in a letter to EU President Donald Tusk. The letter will pave the way for detailed talks among EU leaders. Mr Cameron has committed to negotiating a “better deal” with the EU by the end of 2017. Britain has made progress on securing support for the first three of its demands which are protecting the rights of countries outside the euro zone, increasing economic competitiveness within the EU and giving national parliaments more powers. The fourth objective seeks greater control on migration and may prove the most difficult to achieve.

ECB governing council member Erikki Linkanen, speaking in Helsinki yesterday, noted that the euro zone’s inflation and growth prospects are facing downside risks. He further commented that “the Governing Council is willing and able to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation.”

In early trading this morning, European stock index futures are slightly higher as the markets continue to analyse economic data from China. Date released overnight showed that industrial production growth fell to a six-month low in October. The Stoxx Europe 600 Index closed 0.1 percent higher yesterday and European stocks have rebounded 12 percent from a September low. With the probability of a rate increase by the Fed in December increasing, and the ECB hinting at additional stimulus, investors are keenly awaiting the two policy meetings for clarity on the future trajectory of monetary easing.

On the commodity markets, the International Energy Agency said that OPEC’s share of the global oil market will expand from 2020 as prices recover and supply from outside the group stagnates due to spending cuts. They forecast that OPEC’s current share of the global supply will remain steady at 41 percent until 2020 and will then increase to 44 percent by 2025. OPEC’s decision last year to defend market share has impacted negatively on US shale oil, as the price of crude oil has fallen by 40 percent . The IEA notes that although the fall in the oil price has “sharply” reduced the group’s revenues, it will ultimately prove to be beneficial for members that are able to increase output.

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