USA dollar hits June highs after data backs continued Fed tightening

Sunday, 18 Jun, 2017

Policy makers in Japan, Switzerland and Britain are also scheduled to weigh decisions this week.

The Fed said a recent softening in inflation was seen as transitory, but the latest tepid price readings made investors question its view that the USA economy is continuing to improve. The dollar jumped 1.2% against the Japanese yen to ¥110.93 and the euro fell 0.7% against the dollar to $1.1146.

The spread between the two-year (SHY) and ten-year (IEF) yields dropped from 105 basis points to 80 basis points in the last six months, resulting in a flatter yield curve. Interest to add fresh shorts gained traction on the break of $1.1185 support, said the traders, who asked not to be identified as they weren't authorized to speak publicly.

The Australia dollar rose 0.2 percent to $0.7605, moving back toward its 2-1/2-month high of $0.7636 hit on Wednesday, after a better-than-forecast employment report. Global currency volatility approaches the record lows seen during the summer of 2014 and with major central banks on hold, it may take a black swan event to unfold for it to rebound convincingly.

However, the slippage in longer-dated yields may imply that investors aren't as unfazed by a batch of data, including a recent tepid reading of consumer prices (http://www.marketwatch.com/story/inflation-falls-again-in-may-as-cpi-recedes-from-recent-high-water-mark-2017-06-14) and the Friday's housing data, that have signaled that inflation and perhaps the economy, may not perform as optimally as the central bank hopes. Despite this, the Fed indicated that it still planned a third interest rate hike before the end of the year.

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On the macroeconomic front, NY Empire State manufacturing, initial jobless claims, the import and export price indices and the Philadelphia Fed manufacturing survey are at 1330 BST.

Germany's final May inflation stats met expectations, dropping from 0% to -0.2% month-on-month and drop 2% to 1.5% year-on-year.

While the Federal Reserve did hike U.S. interest rates, underwhelming United States inflation data and a lower inflation forecast from the Fed has led to speculation that there won't be any further USA interest rate hikes before the end of the year.

The Fed has a 2 percent inflation target and tracks an inflation measure which is now at 1.5 percent.

Charles Melchreit of Pioneer Investments says markets may be finding it "a bit of a comforting outcome", that the Fed isn't willing to shift the rate hike path it has set out that quickly, even if current inflation numbers aren't backing it up. However, disappointing USA inflation data released the same day raised questions about whether the central bank will be able to hike rates again later this year. Spot gold fell 0.2 percent at $1,263.03 an ounce. Crude traded near a seven-month low. May's drop was the largest since January 2016 and confounded economists' expectations for a 0.1 percent gain.