Economic Conditions

The market recognizes that the indication by the FOMC at the end of last year that four rates hikes in 2016 may be appropriate was far from the mark.  At the same time, investors are coming around to the prospects that the Fed is not one and done either. 

A key issue for investors and policymakers is the terminal rate for Fed funds.  This terminal rate is what economists call the natural or neutral interest rate.  It is the rate that is consistent with full employment, capacity utilization and stable prices. 

The US dollar is trading firmly, largely within yesterday's ranges.  The odds implied by the September Fed fund futures eased to 36% from 42% before the weekend, but ahead of Fischer's Bloomberg TV appearance, and tomorrow's ADP employment estimate, the market seems cautious about fading the dollar's strength. 

With 17 simple words and the help of clarification from her deputy, Yellen changed the near-term dynamics in the capital markets.  By saying that "...I believe that case for an increase in the federal funds rate has strengthened in recent months," Yellen placed her marker down.

The US dollar had spent the last full week of August mostly confined to narrow trading ranges against the major currencies until the Yellen spoke as at the end of the week.  She confirmed the constructive assessment of the economy already offered by both Fischer and Dudley in recent days. While acknowledging that the case of a rate hike was strengthening, she shed no light on the timeframe.

The US dollar remains mostly within the ranges seen yesterday against the major currencies. The market awaits fresh trading incentives and the end of the summer lull, which is expected next week.  The Jackson Hole Fed gathering at which Yellen speaks tomorrow is seen as the highlight of this quiet week.  

The US dollar is going nowhere fast.  It is narrowly mixed against the major currencies.  The market waits for fresh trading incentives, with much hope placed on Yellen's presentation at Jackson Hole at the end of the week.  Is it too early to suggest that the build-up ahead of it is too much?

The US dollar is mostly little changed against the majors, as befits a summer session.  There are two exceptions. 

The first is the New Zealand dollar.  Comments by the central bank's governor played down the need for urgent monetary action and suggested that the bottom of cycle may be near 1.75% for the cash rate, which currently sits at 2.0%. This means that a cut next month is unlikely.  November appears to be a more likely timeframe. 

The US dollar lost ground against nearly all the major currencies last week. The sole exceptions were the Australian dollar, where pressure ahead of the weekend following Moody's decision to cut the outlook for five Australian banks wiped out the previous small gain, and the Norwegian krone, which was really flat with less than a 0.1% loss.  

The US dollar is trading firmly ahead of the weekend as part of this week's losses are recouped. The gains are sufficient to put it higher for the week against the Australian dollar.  If its gains against the Aussie were sustained, it would be only the second weekly gain since the end of May.

Although the news stream is light, the Aussie has been undermined by the one of the few developments today.  Moody's cut the outlook for five Australian banks from steady to negative, setting the stage for likely rating cuts in the coming months. 

All that is solid is melting.  After Copernicus, we know that earth is not the center of Creation.  Darwin showed us that humans are part of the animal kingdom.  Freud told us we are not even masters of our own house.