Oil sinks, CAD drowns; FOMC key to USD fortunes

After a brief hiatus the greenback has found form over the last 24-hours or so. Crude oil sunk to fresh 6-year lows overnight and depending who you speak to its OPEC’s fault, or a stronger US dollar ahead of next week’s rates decision. Whatever the case, there’s little doubt the US interest rate decision next week is crucial for the greenback.

Staying with the oil thematic, we discussed earlier this week its correlation with the Canadian Dollar. The CAD’s been stung again and the USDCAD pair continues to peak at fresh 11-year highs daily. For those following Adam Taylor’s recent reports on the CAD, he chose to express probable CAD weakness against the Japanese Yen. A view which has paid off with the short-term technical target of 89.35 now breached.

CADJPY – Technical target of 89.35 breached

Locally, the Australian dollar has eased off after yesterday’s jobs data, settling back in to the mid 72’s. We saw the Aussie jump to 73.35 US cents yesterday after the data, but it was a short lived rally with the accuracy of the data in doubt, amid broad based US dollar strength overnight.

Deutsche Bank reckons the probable increase would be around 5-20K new jobs due to sample rotation skewing the result. In simple terms, the ABS use sample groups to derive its figures, and the Deutsche bank believes “the group that rotated into the survey in November had a much greater tendency to be employed than the group that rotated out.”

From here it’s all about the FOMC decision on December 16, with Yellen and the committee widely expected to increase the federal funds rate by 25bp. While all the signs are pointing to a rate increase, it’s not such a simple equation for the greenback. Certainly it’ll be a huge shock if the Fed don’t raise rates, but equally important is what impression they give markets over the pace of any proposed ‘normalisation’ of rates. Dollar longs will be betting on some form of commitment from the Fed that future hikes are on the cards.

An example of how a lack of commitment can upset markets was this week’s RBNZ rates decision. The RBNZ cut rates, but instead of taking a hit, the Kiwi rallied which suggests markets had overpriced the RBNZ’s desire to cut further. In his statement, Governor Graeme Wheeler said rates will be cut further if “circumstances warrant” but leaves the impression that current rates should do the trick.

Coming up in Europe is German CPI, which is seen as a barometer for the Euro area generally.  After that the US dollar will get a chance to extend its run higher with retail sales on the agenda which is expected to show growth of 0.3 percent in November from a 0.1 percent in October.