Yellen testimony hints at dovish Fed outlook

Thursday, February 11, 2016

Janet Yellen gave testimony to the House Financial Services Committee yesterday and as expected, played down the likelihood of another interest rate rise in March. The dollar rallied towards 96.720 at one point but failed to hold onto these gains as the greenback lost ground against a basket of major currencies throughout the remainder of the session, ending the day around 95.880 with the under pressure outlook persisting early this morning. The committee took the opportunity to grill Chair Yellen on why exactly the Fed is paying interest to big banks on the excess reserves that they hold with the central bank. The vast majority of these excess reserves which the Fed had credited to the banks during QE. The effectiveness of monetary policy has been called into question on numerous occasions but with the Fed’s balance sheet at record levels it will be some time before we see any effective management of interest rate policy.

The weaker dollar failed to offer much support to the base metals complex with zinc and tin the only two registering gains on the day. Market uncertainty saw early gains in lead and aluminium quickly reversed and with downward pressure persisting on copper and nickel investors were steering clear of risk assets. Three month aluminium prices face some pretty strong headwinds towards $1,500/tonne with spikes overnight attempting to gain a footing above this level failing to take root. Rusal has announced that it may initiate further production cuts as smelters that the company idled in 2013 were unlikely to be fired up again. Cuts totalling around 200,000 tpy are planned building on last year’s curtailment and production cuts by Chinese producers are starting to be seen with output pulling back in December. LME aluminium premiums are expected to stabilise around current levels and with Rusal expecting a global deficit of 1.2m tonnes this year, from a surplus of 600,000 tonnes last year we could see aluminium prices bolster support around $1,500/tonne but we remain cautious to significant resistance around $1,550 which could prove difficult to overcome.

Front month Brent futures continue to trade under pressure this week but support around the $30-$30.50/bbl level continues to hold up well. We’re surprised that persistent dollar weakness over the past week and half hasn’t offered much support to crude markets but comments from Bob Dudley, CEO of BP hinted at ongoing weakness throughout the first half of the year. Crucially, concerns regarding global storage capacity reaching its limit could see fundamentals take the driving seat towards the latter half of the year as producers are forced to cut production, however, prices will likely remain under pressure over the near term.   

Dollar reverses direction and gives back gains

DXY Curncy DOLLAR INDEX SPOT 5 2016 02 11 07 59 31

LME aluminium prices struggle to gain a footing above $1,500/tonne

LMAHDS03 Comdty LME ALUMINUM 3 2016 02 11 08 17 57

Events for today

JP, CN Market Holiday 

0001

UK

Dec

RICS House Price Balance

1300

US

w/e

Initial Jobless Claims

1330

US

Jan

Continuing Claims

1445

US

Feb

Bloomberg Consumer Comfort

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