Fed Believes Economy will be OK, Fed Chances Go Up, but No USD Rally

 

USD

The U.S. Dollar is trading in mixed ranges this morning having improved overnight against commodity-based currencies while faltering against most European counterparts. Prices of metals continue to drop on concerns over fading Chinese demand as the world’s second largest economy is making efforts towards services and focusing less on manufacturing. Consequently, the currencies of countries dependent on the demand for raw materials and natural resources are down. However, the greenback remains weak against EUR and GBP despite the positivity displayed during the FOMC meeting yesterday.

Chances of an interest rate increase at the next June 14th meeting climbed to 97.5% after the Fed announcement as officials seemed to downplay the recent slump in economic indicators. Furthermore, there was no mention of what to do with the balance sheet and the tone was optimistic about maintain the rate outlook to a total of three hikes this year. Gradual tightening will be the law of the land and we expect that if figures improve in the next month the dollar will gain ground. We have another vote scheduled today on healthcare overhaul in Congress and we’ll update if that has any effect.

 

EUR 

The Euro advanced further overnight as a result of a highly praised performance by candidate Emmanuel Macron at the final debate before this Sunday’s French elections. Marine Le Pen apparently was not at her best and was being schooled by a man who was relatively unknown not long ago. His lead is of 20 percentage points according to polls, but the world is still anxious over the potential of a “Frexit.”

If Le Pen wins, the Euro will plummet as the very existence of the European Union will be at peril. Euro could have some “relief spikes” next week if Macron triumphs, but we do not see a rally that would exceed current ranges by much.

 

CAD 

The “Loonie” has depreciated aggressively in the past few weeks, now swimming around its worst levels against USD since February 18th, 2016. Oil price fluctuation has certainly not helped, with major dips being the result of unexpectedly high production in North America regardless of an agreed output cut by OPEC nations as well as Russia. CAD reflects the problems being faced by currencies highly affected by the oil glut, but there is hope in the horizon for our neighbor currency.

The non-energy sector has been growing, the accommodative stance by the Bank of Canada may change if inflation spikes, and threats to trade agreements such as NAFTA may force Canada to use its leverage in working other deals. One thing for sure is that the animosity towards open trade from the new administration in the U.S. has made Mexico and Canada’s relationship tighter while South American economies interested in further free trade improve their economic outlooks. This however may only be seen in the long-term as current weakness may be here unless oil demand and prices go upward in the summer.