The Federal Reserve has officially run out of room to cut interest rates. For the first time since August 2007, they left interest rates unchanged at a target range of 0 to 0.25 percent.
The dollar rallied because the Fed did the minimum of what was needed to pacify the market, which was to say that they could purchases Treasuries but are not going to do so right now.
Currency traders were looking for something more radical such as inflation targeting or a bold announcement that they start buying long term Treasuries in size – which would have been dollar bearish. Interest rates could remain at current levels for the next six months as the central bank focuses on credit easing.
The Federal Reserve was pessimistic about the outlook for the US economy and said that inflation could continue to remain weak in the coming quarters.
In the long run, the Fed’s lack of commitment is still….
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In my Daily Currency Focus for GFT I talk about how Obama’s first 100 days can impact currencies:
In yesterday’s Daily Currency Focus we warned that investors should not bank on an Obama bounce. Based upon 5 decades worth of data, the Dow Jones Industrial Average fell more often than it rose on Inauguration Day. In fact stocks fell more on Barack Obama’s Inauguration Day than any other President. Since currencies are taking their cue from equities, we have seen a sharp slide in almost all of the major currency pairs. The dollar has outperformed the Euro and British pound but it has declined against the Japanese Yen indicating that the dollar’s rally is a reflection of pessimism and not optimism. We are seeing a flight to safety into US dollars but bonds are the instruments of choice and not equities.
President Obama inherits a very troubled economy and he certainly has his work cut out for him over the next few years. However brighter times may lie ahead for US stocks based upon the performance of the Dow in the first 100 days on a President’s term.
Currencies: What to Expect in Obama’s First 100 Days
The first 100 days of an Administration can define a President. Barack Obama is expected to usher in a number of reforms that may help to reinvigorate the American economy and boost consumer confidence. The fact that stocks have fallen more than 8 percent since the beginning of the year provides a low base for any bounce. More importantly however we typically see the Dow rise in the first 100 days of a new President’s Administration as investors become optimistic about new policies. Stocks rose in the first 100 days of a President’s term 11 out of 16 times. Political party doesn’t really matter but of the 5 times that equities dropped in the first 100 days, 4 out of the 5 were during Republican Presidencies. So even though President Obama is handed an ailing economy, the silver lining is that history is on his side and most likely he will be celebrating a stronger stock market after his first 100 days. A stronger stock market should mean a recovery of risk appetite, which could help reverse some of the losses that we have seen today in the EUR/USD, GBP/USD and USD/JPY. It is important to keep in mind that a rally is not guaranteed as the recession in the US economy is the worst since the Great Depression. The economic outlook can weigh on equities which would diminish the significance of the historical price pattern.
In my Daily Currency Focus for GFT, I talk about whether there will be a bounce in currencies on Obama’s Inauguration Day:
On Tuesday, the United States of America will swear in a new President. Unlike many other Presidents in the past, the Obama phenomenon spans the globe. This global support has spurred speculation that we may see an Obama Bounce in US equities and currencies on Tuesday. However based upon the past price action of the Dow Jones Industrial Average on Inauguration Day (Jan 20), investors should think twice about an Obama Bounce.
Taking a look at 50 years worth of data which spans 10 Presidents, Inauguration Day result in more down days than up. The Dow fell on January 20th 12 out of the past 16 Inaugurations. Although the trend was much more significant in the 60s and 70s, it has been relevant since then. The pattern also does not hold any bias to the party of the new President as exactly half of the positive days occurred during either parties new administration.
However it can be argued that the global adoration of Obama is unique. Many people call Barack Obama the John Kennedy of our times and it should be worth noting that stocks rallied on the day that Kennedy took office. History does not support arguments for an Obama Bounce but it is still a possibility. Since currencies are taking their cue from equities, if investors express their optimism towards Obama in equities, we could see a bounce in currencies as well.
For my Bank of Canada Interest Rate Preview, please read my Daily Currency Focus on GFT
The Wall Street Journal has a comprehensive article on how President Obama will be spending the Democrats’ proposed $850B economic stimulus plan. The article is definitely worth a read. Here are the highlights (click to enlarge):
Tomorrow’s Treasury International Capital flow report will shed more light on whether the low yield in the US has driven sovereign wealth funds out of the US dollar. According to a recent report by China, they have continued to buy US dollars despite doubt that they would be unwilling to fund the growing US deficit.
With the Bush Administration leaving office on Tuesday, it is interesting to consider if the Obama Administration will change its approach on China. As Treasury Secretary, Paulson has favored the buddy versus bully approach to China. Although the Chinese Yuan has appreciated 15 percent over the past 2 years, it is still considered undervalued. If Obama labels China as a currency manipulator or takes more active measures to get the Asian giant to strengthen the Yuan, it could lead to further USD/JPY weakness as it would give the Bank of Japan less reason to intervene and sell the Yen.