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WTI crude oil declined for a 4th consecutive day and closed at 73.93, -2% from Friday amid strong rebound in USD. Selloffs in risky assets accelerated after the FED chairman Ben Bernanke said that the US economy is facing 'formidable headwinds' due to weak labor market and tight credit.
Gold also extended weakness and plunged to as low as 1136.1 before rebound. February's contract recovered in NY session and settled at 1164, down -0.5% for the day. The strong recovery from the severe selloff indicated underlying firmness in the yellow metal.
In a speech to the Economic Club of Washington, Bernanke said that 'the economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate'. Moreover, he also anticipated 'subdued' inflationary pressure.
When asked about the timing of rate hike, the Fed Chairman reiterated the stance of keeping rate low for 'an extended period' but FOMC members will factor in recent signs of strength in the discussion next week. The comment disappointed many hawks in the market and the Fed funds futures projected a 3.2% chance (4.4% before Bernanke's speech) that the Fed will lift its benchmark interest rate to 0.5% in January. However, this was still higher than the 1.8% probability a week ago
USD rose against major currencies both on speculations of FED's rate hike and demand for safe haven asset after Bernanke's comments. The greenback rallied +0.3% and +0.2% against the euro and the pound respectively.
Against commodity currencies, the dollar also advanced, by +0.2%, +0.4% and +0.7% against CAD, AUD and NZD. The Bank of Canada and the Reserve Bank of New Zealand will discuss about interest rate this week but we expect both central banks will maintain their policy rates at current levels. However, policymakers may warn that appreciation in the country's currency will delay the pace of recovery.
At Tuesday's meeting, the BOC should most probably announce to keep its policy rate at 0.25%. Recovery has been seen in Canada since the last meeting. Unemployment rate surprisingly dropped to 8.5% with 79.1K increase in payrolls in November. However, GDP growth in 3Q09 missed market expectation. It's unlikely that the central bank will deliver a more hawkish view before recovery proves to be self-sustainable. Therefore, we expected the BOC will reiterate that 'conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target'
