Daily Forex Fundamental Overview

Fundamental Analysis

USD

“We are watching developments very carefully. I would say there is always some chance of a recession in any year. But the evidence suggests that expansions don't die of old age.”

- Janet Yellen, Fed Chairwoman

During the second-day testimony to Congress Fed Chairwoman Janet Yellen stressed that the US central bank was not on a “pre-set” path to normalize the monetary policy amid deteriorating meltdown in global equity markets. As recessions fears build in the US, Yellen did not excluded a “chance” of a downturn ahead. She also said that the Fed is studying whether negative interest rates would help in case conditions worsen further. The Fed had considered negative interest rates in 2010, but decided to refrain. The head of the world’s most influential central bank admitted that a weakened global economy and a sharp drop in stock markets was tightening financial conditions quicker than the Fed estimated. Yet, Yellen warned against making hasty conclusions about the extent of threat from overseas to the US economy.

However, Yellen still expected the Fed to gradually hike interest rates this year given resilient US labour market and steady economic growth. The recent report released by the Labor Department revealed that the number of Americans applying for unemployment benefits dropped more than expected last week. Initial claims for jobless benefits dropped 16,000 to a seasonally adjusted 269,000 for the week ended February 6, whereas economists had predicted 281,000 applications. The four-week moving average of claims fell 3,500 to 281,250 last week.

AUD

“It's, I think, pretty unlikely we're going to be raising rates any time soon”

- Glenn Stevens, RBA Governor

Testifying before the House of Representatives Economics Committee, RBA Governor Glenn Stevens said that the Australian economy continued to grow at a sub-trend pace, but a weaker Aussie Dollar and easy monetary policy is supporting growth. Stevens stressed that further easing is possible if inflation slows and global headwinds threaten Australia’s growth trajectory. The central bank head estimated that inflation is unlikely to cause near-term issues over the next two years though, partly due to the weakening Australian Dollar, which was tracking falling commodity prices. Like most other central banks, the RBA noted the elevated risks associated with recent market volatility.

The RBA cut the official cash rate two times last year in an attempt to cushion Australia’s post-mining boom economy, helping to push exchange rate lower amid the commodity downturn. Stevens confirmed that rates are likely to remain steady for most or all of 2016. With regards to China, Australia’s key trading partner, Stevens said that the world’s second largest economy is growing weaker than its officials want and that “some observers” have expressed concern. Stevens believes that a portion of international pessimism is overdone. China has faced capital outflows and has been the driver for market turbulence, which the RBA thinks is due to policy uncertainty.

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