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From the Floor: Dollar slides on Alabama upset, FOMC up today

   • Dollar retreats as Alabama upset shrinks Republican Senate majority
   • Hike priced in, yield curve in focus ahead of today's FOMC meeting
   • Brent surges on Scottish pipeline break, EIA and Opec reports due today
   • Market expects 2.2% headline, 1.8% core CPI reading from US
   • Gold and silver remain under significant pressure: Hansen

By Michael McKenna

Despite a pullback in support from centre-right Republicans, scandal-plagued Alabama Senate candidate Roy Moore had the backing of President Trump into his upset loss Tuesday. The outcome says a great many things about this specific cultural moment that we are pleased to report remain outside the scope of today's Morning Call, but in dollar terms we saw a pullback on the Republicans' Senate majority shrinking to 51.49.

"This means that tax reform needs to get done sooner rather than later," says Saxo Bank head of forex strategy John J Hardy, adding that the reform bill is now more likely to be placed in jeopardy by "establishment Republican" holdouts. 

(As to the likelihood of this, recall John McCain's vote against Obamacare repeal that came after years of campaigning for that precise legislative change...)

With Alabama behind us, the next big dollar catalysts come today in the form of a CPI reading at 1330 GMT and the Federal Open Market Committee's interest rate decision at 1900 GMT.

According to Hardy, the key things to watch here relate to the 2018 policy tightening path and the yield curve, with Saxo fixed income specialist Althea Spinozzi reporting that a more aggressive Fed (perhaps post-tax reform, if the growth and employment gains are in fact realised) would lead to a further flattening of the curve with each rate hike pushing up the short end.

Dollar index in the crosshairs:
USD index

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Source: Saxo Bank 

Beyond the Fed, Saxo Bank head of commodity strategy Ole Hansen reports that the pipeline rupture in Scotland's North Sea Tuesday pushed Brent crude prices to a 2½-year high on the biggest supply disruption (over 400,000 barrels/day for the next couple of weeks) this year.

Prices then declined, however, with Hansen adding that we may be seeing the first signs of end-of-year profit-taking.

"The short-term focus in Brent is $63/barrel," concludes Hansen, noting that today sees the release of both Opec's monthly report this morning and the latest stockpiles data from the US Energy Information Administration at 1530 GMT.

One final thing to note, says Hansen, is that the EIA has just raised its forecasts for US production and non-Opec supply growth in 2018.

For more on crude oil, precious metals, forex markets, and bonds, watch today's Morning Call in full.

Montgomery, Alabama
Montgomery, Alabama: The prospect of another Republican body in the Senate wasn't enough to distract voters from the seedy accusations facing Roy Moore. Photo: Shutterstock

Michael McKenna is senior editor at Saxo Bank
13 December
Market Predator Market Predator
@Althea: Personally, I believe that flattening of yield curve is serious aspect of current Market. Interesting development can be seen also before 2008 fin. crisis. Could current status signal something?
13 December
Althea Spinozzi Althea Spinozzi
Hi Market Predator, yes it is true that levels are in line with the ones found before 2018 however it is hard to say whether a flat yield curve alone signals an imminent recession. I believe that a yield curve needs to be seen together with core inflation data, which until now have been quite weak. It would be interesting to see what happens in the next few months, however I still believe that short maturities may represent an opportunity at the moment. By staying short duration, it is possible to lock in an ok yield and in the case there is a correction, proceeds would be available relatively soon in order to invest in better opportunities. The yield curve flattens during periods of economic expansion, however, during a recession the curve gets steeper - if the FED hikes interest rates the short part of the curve will push higher contributing to more flattening. Very hard to say when this viscious circle will end!
13 December
Market Predator Market Predator
OK, thanks for your response.
13 December
Althea Spinozzi Althea Spinozzi
Thanks to you MP always very nice seeing your comments :)


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