Article / 23 August 2015 at 22:38 GMT

Risk-off tone continues as Asian markets open

Managing Director / Technical Research Limited
New Zealand
  • The odds of a Fed rate hike next month have receded
  • US second quarter GDP could push the chances of a rate hike back to 50/50
  • Some see the influence of commodity prices on inflation rate as “transitory”
  • Traders will need to tread cautiously this week

By Max McKegg

The US dollar was on the defensive but steady on the major crosses when the New Zealand and Australian markets opened this morning, as events continue to conspire against the consensus the US Federal Reserve will deliver a rate hike on September 17. Depending on which measure you use, the odds of that happening have receded from 50/50 just 10 days ago to about 30% now. So for US dollar bulls, it’s a continuation of the familiar story: three steps forward and two steps back.
There are some economic data prints due out of the US this week that have the potential to put the dollar back on the front foot, and by this time next week traders may be wondering why they ever doubted its credentials. However a week is a long time in the markets and there is a lot of water to go under the bridge, so traders will need to tread cautiously.


The falling price of oil has played havoc with central bank inflation targets, but some respected figures believe the impact of the crude oil plunge will only be transitory. Photo: iStock

Inflation expectations slump
First let’s look at a chart that summarises concerns as to why the rate hike, and therefore the dollar rally, has been postponed, if not cancelled. Inflation expectations – a key indicator for monetary policy – began the year in a promising uptrend with the break-even inflation rate derived from the spread between conventional Treasury bonds and the same maturity Treasury Inflation Protected Securities (TIPS) heading towards 2%. But in the last few weeks the trend has reversed and is heading back towards the previous lows, dragged down by crude oil prices.

WTI crude and Tips

Source: ANZ Bank. Create your own charts with SaxoTrader; click here to learn more.

The Federal Open Market Committee (FOMC), along with its “Big Three” central bank colleagues in the European Central Bank and Bank of Japan, have pencilled in an oil price of about $70/barrel by mid-2016 as a basis for projections their common 2% inflation target will be reached. That wasn’t a stab in the dark; rather reliance on the futures curve applying at the time. Oil can be a volatile beast, so the price could still reach that level in time to save the day, but hard-nosed traders are doubting it. Hence the falling break-even inflation rate in the chart above.
Nevertheless, there are plenty of respected observers who think the influence of commodity prices on the inflation rate will be “transitory”. One of those is Federal Reserve board heavy-weight James Ballard. In an interview discussing monetary policy on Friday he said the outlook for economic growth was “relatively good”, there had been “very good progress” in the labour market and “I think you can look through the decline in oil.”
His confidence that the oil price won’t become a spanner in the works will be tested on Friday when we get an update on the Fed’s inflation benchmark, the price index of Personal Consumption Expenditures (PCE). Ballard must know as well as everyone else that the July headline rate won’t have risen much above zero and that it would be wishful thinking to expect the year-on-year rate of increase in core PCE to have “rallied” any further than 1.4%.


But those taking the “glass half-full” approach to the US economic situation are likely to get more joy from Wednesday’s second quarter GDP update. Ballard expects the economy to expand “above trend” in the second half of 2015, and a good number this time will add credence to that view.

The first estimate of the annual change in the second quarter was 2.3%, as shown in the chart below. Wednesday’s update could take it up to a very solid 3.2% or even higher, and all of a sudden the odds of a September rate hike would be back up to 50/50 and the dollar back on the menu.

GDP  growth
Source: New York Federal Reserve
The case against delay
When it comes to taking a position on the will-they-or-won’t-they question of a September rate hike, it’s worth keeping in mind that it won’t be “the market” that makes the call but just the 10 voting members of the FOMC, and although he is a highly respected member of the Federal Reserve Board, James Ballard doesn’t have a vote this year. So while his comments on Friday were interesting, we will get more pertinent guide to the outcome when on September 4 Committee voter Jeffrey Lacker outlines the arguments for an imminent rate hike in a speech entitled “The case against further delay”.
The date and title of the speech were released on Friday, and Lacker would have been well up with the play on economic developments post the FOMC’s last meeting on July 28-29. So we can assume the title was carefully chosen and therefore chalk him up as a “vote in favour” when a rate hike is discussed at the September meeting. Presumably then, Ballard, Lacker and fellow bulls on the FOMC are loading up on inflation-linked bonds for their personal accounts. Another influential Committee member William Dudley will be speaking this Wednesday.
My trade to take advantage of the “risk off” environment on Friday was EURUSD and my short term profit target has been met (see Euro rally has further upside potential for EURUSD).
If you would like more trading advice then let me know.

– Edited by Robert Ryan

For more on forex, click here.

Max McKegg is managing director of Technical Research Limited. Follow Max here or post your comment below to engage with Saxo Bank's social trading platform.

danielrequ danielrequ
This comment has been redacted
ListerChaves ListerChaves
This comment has been redacted
Patto Patto
Who is this idiot Lister ?
Juhani Huopainen Juhani Huopainen
A spammer.


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail