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- Asian shares were set for sizable weekly losses, with equities faltering again on Friday as plunging crude prices and a tumble in China’s yuan to almost 4-1/2-year lows added to worries about receding global growth. A supply glut in oil markets and cooling growth in China, the world’s biggest commodities consumer, have pressured many asset markets ahead of a widely expected hike to U.S. interest rates by the Federal Reserve next week. The People’s Bank of China (PBoC) set its guidance rate at the weakest level in more than four years on Friday, a sign Beijing is permitting the currency to depreciate after it was included in the International Monetary Fund’s reserve basket. The lower fixings have also raised questions about how far the central bank intends to let it depreciate.
- The dollar steadied on Friday, given some breathing space after a recent surge by the euro lost momentum in wake of dovish comments by a policymaker, and while profit-taking trimmed some of the Australian dollar’s big gains made on an unusually strong domestic jobs report. The euro was little changed at $1.0936 after shedding about 0.7 percent overnight. It was forced back from a 1-month high of $1.1044 scaled midweek after ECB Governing Council member Erkki Liikanen said Thursday the central bank stands ready to ease monetary policy further if required. The greenback may have suffered big losses against the euro this week but the seemingly inevitable divergence in U.S. and European monetary policy was expected to continue supporting the dollar in the longer term. The Federal Reserve is widely expected to hike interest rates next week for the first time in nearly a decade. The dollar index was up about 0.1 percent at 98.056. But it was on track for a weekly loss of about 0.3 percent after investors trimmed dollar-long positions ahead of next week’s U.S. Federal Reserve meeting at which the central bank is widely expected to hike interest rates for the first time in nearly a decade. Fed fund futures place an 85 percent chance of the Fed raising rates at its Dec. 15-16 meeting. A recent Reuters poll also showed that all but one of 18 brokerages that deal directly with the Fed expect a rate increase.
- Federal Reserve Chair Janet Yellen next week has to decide not only whether to raise interest rates for the first time in a decade, but also how to assure markets on the likely path of future rate hikes. The central bank has held short-term borrowing costs near zero for seven years and the last thing policymakers want is for their first rate hike to trigger expectations for future increases that could knock economic growth off track. Traders currently expect the Fed to raise interest rates two or three times next year. Fed officials have used quarterly projections to flag a slightly faster pace of increases, but fresh forecasts to be released next week are expected to hew more closely to the market’s view. The forecasts may also show policymakers are banking on slower long-term economic growth and for interest rates to top out at a lower level than was historically the case. A pause of three to six months between rate rises is consistent with economists’ expectations in a Reuter’s poll last Friday, after employment growth boosted confidence that the Fed will raise rates in December. Yellen and other Fed officials have for months been suggesting that rate rises, once begun, will be “gradual”. Next week’s statement could be tweaked accordingly, rather than repeating the promise of a “balanced” approach to rate increases in the statement from the last meeting. Yellen may have pointed to a second change in the statement in a speech last week in New York, noting that the Fed will focus on “actual progress” toward the Fed’s 2.0 percent inflation goal as it assesses how fast to raise rates. Crude prices remained at levels not seen since 2009 in early Asian trading on Friday as oil output in the Middle East continued to rise despite an existing global glut. The rout is a result of a huge overhang in production that is fast filling onshore storage sites, which some analysts expect to run out in early 2016. Soaring output from OPEC member Iraq has been a large contributor to that glut, with production there doubling over the past decade to around 4.3 million barrels per day, more than enough to meet all of India’s daily demand. OPEC as a whole pumped more oil in November than in any month since 2008 despite forecasting little demand growth for crude next year in a bid to defend market share. The cartel’s strategy to safeguard market share by pumping at record levels might be working. U.S. shale oil production, the main driver of non-OPEC supply growth, is expected to fall for a ninth consecutive month in January, according to a forecast on Monday from the U.S. Energy Information Administration. The effects of oversupply are also spilling into the U.S. natural gas market.