Week Ahead - U.S. December Rate Hike Chances Boosts Dollar

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Fedspeak points to a rise in interest rates next month

Fed fund futures are signalling a 95 percent probability of a rate hike when the Federal Open Market Committee (FOMC) meets on December 14. A repeat of last year's lone rate hike is in the works for 2016. Donald Trump's election while surprising seems to have brought inflationary expectations that were a concern for the American central bank this year. The minutes of the last FOMC meeting will be released on Wednesday, November 23 at 2:00 pm EST and are expected to bring more insights into how close Fed members are to a rate move.

Emerging markets have seen the biggest losses of a Trump victory as a strong USD and trade concerns have hit assets. The Mexican peso (MXN) has depreciated 12 percent since the U.S. election result. The decision by the Mexican central bank to raise rates by 50 basis points managed to slow down the speed of the move, but not the direction.

The schedule economic events during the week of November 21 to 25 will not bring major revelations about the global economy. Political risk continues to be high as the transition of power in the U.S. kicks into high gear and will bring more transparency into the shape of the Trump presidency that starts on January 20, 2017.

The EUR/USD depreciated 2.28 percent in the last 5 days. The single currency is trading at 1.0598 as the USD continues to advance versus the EUR. The USD index has touched 14-year highs on the back of strong Fedspeak talking up the probability of a rate hike in December and the aftermath of the shocking victory of Donald Trump in the U.S. presidential elections. The much-awaited interest rate rise by the U.S. Federal Reserve will be in focus on Wednesday as the FOMC releases the notes from the meeting in November. With three dissenting votes against keeping rates on hold at that time, and the strong comments supporting a rate hike from voting and non-voting Fed members, it appears to be an almost certainty and a repeat of last year.

President-elect Trump has raised inflation expectations as his plans to boost U.S. growth are based on fiscal policy and infrastructure spending. That also puts some pressure on the Fed to hike rates at a faster pace to keep those inflationary forces contained.

The USD/MXN rose 1.602 in the last 5 weeks. The peso has depreciated despite the efforts of the Banco de Mexico which hiked rates 50 basis points on Thursday. The currency pair is trading at 20.54 and could regain historic highs as the USD rally is heating up specially against emerging market assets. The Mexican peso did not get a big boost from the move by the central bank as the hike only met market expectations. Some investors were even forecasting moves in the 200 basis points range. The shocking win by Donald Trump in the U.S. elections has put double pressure on the MXN. The currency is being used as a proxy for emerging markets in Latin America due to its liquidity and comments from the now President-elect Trump tied the price of the peso to the fate of his election. A Trump win could mean a rewriting of trade agreements between the U.S. and Mexico. Mexican exports to the U.S. account more than 80 percent. Large foreign direct investment projects have not been pulled back, but going the fate of new projects is a question mark until Trump's agenda for trade and Mexico in particular are revealed.

The Mexican central bank for the most part made the right call in meeting market expectations and keeping its powder dry by not jumping to intervene on behalf of the currency during its depreciation. Trump has not been sworn into office and there might be a gap between campaign promises and actual policy. Trump's victory is full of unknowns with markets following recent developments to price in any new information that becomes available.

West Texas oil rose 4.947 percent during the week. The price of energy is trading at $45 after a resurgence of the black stuff after monthly lows. Oil prices recovered from losses after the election as the strong dollar narrative shifted to inflation and infrastructure which boost the growth of the energy sector. The Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna on November 30 continues to pull prices in diverging directions as members comment publicly about a difference of opinion on the oil production cut planned.

The agreement was a surprise after the meeting in Algiers as traders were expecting an oil production freeze at best, given the struggle to reach consensus from OPEC members in the Doha meeting in March that ended in a spectacular failure with Iran and Saudi Arabia caught in a visible rift. The two have gone on to work out their differences, but now Iraq has broken ranks and demands an exception from the production limits. The price of oil has been sensitive to the market's perception of how likely the world largest producers will reach a coordinated effort to reduce global supply.

Market events to watch this week:

Monday, November 21

11:00 am EUR ECB President Draghi Speaks

Tuesday, November 22

8:30 am CAD Core Retail Sales m/m

Wednesday, November 23

8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Meeting Minutes

Thursday, November 24

4:00 am EUR German Ifo Business Climate

Friday, November 25

4:30 am GBP Second Estimate GDP q/q

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar