By Michael O’Neill Agility Forex Senior Analyst
Three down and one to go! Ever since the Fed failed to raise interest rates in September, the last month of the year was viewed with an unease like that of a 19th century railroad builder hoping to out-run a burning fuse racing to liquid nitroglycerin. It got the juices going and the feet moving.
The fuse was lit but financial markets failed to explode in December. Photo: Shutterstock
The November 30th Organization of Petroleum Exporting Countries (Opec) 171st (Ordinary) meeting was a viewed as a major risk for December. If Opec failed to reach an agreement on the production cut that was promised on September 28, doomsayers predicted dire consequences for global markets. Oil prices would crash and the commodity bloc currencies, particularly the Canadian dollar would sink.
But Opec delivered. All the hand-wringing a fretting, ahead of the meeting, was for naught.
Another huge worry hanging over global markets was the Italian Referendum. There was no shortage of forecasts predicting the end of the Eurozone if the “No” side prevailed. A “no” vote was seen as the first step in Italy’s withdrawal from the European Union, a rejection of the ruling elite and an endorsement of right wing, anti-trade policies. The vote was Sunday and the results were available at the start of trading in Asia.
The “No” side prevailed and EURUSD got spanked. The move was short-lived as traders quickly realized, that for the time being, it was merely another Italian political issue and more hype than substance. By the close of trading in New York on Monday, the Italian Referendum risk was relegated to the trash bucket and, for the time being, no longer a factor in FX trading.
The December 8th European Central Bank (ECB) meeting was eagerly awaited. In October, ECB President Mario Draghi, broadly hinted that an extension of its QE program would be announced at the next meeting.
The current QE program will now last until the end of 2017. At the same time, the ECB disclosed that they were reducing their monthly asset purchases from €80 billion per month to €60 billion per month. The extension had been expected; the tapering not so much. Mr. Draghi emphatically denied that the reduction in asset purchases from €80 billion to €60 billion was tapering. He insisted that the move is merely a pragmatic response to uncertainty and “there is no question about tapering”. It wasn’t discussed”
EURUSD traders didn’t agree. To them, reduced asset purchases meant “tapering”.The single currency plunged from 1.0870 to 1.0620 in a flash, neatly reversing the recent rally and comfortably ensconcing the Euro within its one month trading band.
Next up is the Federal Open Market Committee (FOMC) meeting on December 14. The Fed is almost unanimously expected to raise interest rates by 0.25 bps, in part, because a host of Fed officials have advocated such a move in numerous speeches since October. FX markets have already priced in a rate hike so the impact from the announcement will be negligible.
The surprise will be if the Fed members suggest a faster and sharper pace to future rate increases. There is a contingent that believes Mr. Trump’s infrastructure spending and corporate tax cuts will raise inflation which in a low unemployment environment, would force the Fed to raise rates. If so, that would be the catalyst to drive the US dollar higher and knock it out of its recent trading ranges against the majors. However, Mr. Trump hasn’t even taken office which provides the FOMC with an excuse to adopt a “wait -and-see” approach.
The Canadian dollar has benefited from all the above distractions, particularly the Opec agreement. That run of good luck may be just about over.
The Bank of Canada is cautious and there is still a risk that domestic rates could go lower. The BoC left interest rates unchanged on December 7 which didn’t surprise anyone. In fact, there wasn’t anything surprising, or noteworthy in the statement.
The BoC is cautiously optimistic overall although for every positive economic observation noted, they found an offsetting concern. For example: “Consumption growth was robust in the third quarter, supported by the new Canada Child Benefit”. That statement was followed by “business investment and non-energy goods exports continue to disappoint.”
December is quickly fading away and with it the prospects of a major financial conflagration. The bulk of the meetings have passed and it appears that the market, like the fleet-footed railway worker from days of yore, have avoided being blown up. No funerals this month.