By GrowthAces.com

• Eric Rosengren , president of the Boston Fed, said the central bank should consider trimming its USD 4.5 trillion balance sheet to help raise interest rates more quickly and reduce the negative impact on the economy of a stronger dollar.
• Last month Rosengren was among Fed policymakers who voted unanimously to raise by a quarter of a percentage point the U.S. central bank’s target range for overnight borrowing between banks, to 0.5% to 0.75%.
• After the decision, Fed Chair Janet Yellen reiterated the central bank’s plan to keep its balance sheet unchanged until rates are high enough to give the Fed a more comfortable cushion to cut rates in case of an adverse shock.
• The balance sheet, acquired through years of Fed bond purchases, part of extraordinary measures taken in response to the financial crisis and known as quantitative easing, pushes down on long-run borrowing costs and is aimed at encouraging more business investment and hiring.
• Currently, the Fed uses the proceeds of maturing mortgage-backed securities and government bonds in its portfolio to buy more bonds to keep the balance sheet from shrinking. Yellen has said that once rate hikes are well under way, the Fed will cease those reinvestments.
• Rosengren’s comments suggest he may be advocating for trimming the balance sheet sooner than that. “One reason might be that you might get less of an exchange rate effect from long-term rates than short-term rates and so that would argue for some of the tightening coming by reducing the balance sheet and not having it all be on short-term rates.” Raising short-term rates tends to boost the value of the dollar, which can slow growth and inflation.
• Atlanta Federal Reserve bank president Dennis Lockhart recovery from the economic crisis is “largely done,” and officials should now turn to addressing longer-term issues like how to boost productivity.
• The economy is near full employment, inflation is close to the Fed’s two percent goal, and the U.S. appears locked in for steady growth of around 2% annually, said Lockhart, who is due to retire next month. One risk is that inflation takes off and forces the Fed into a faster pace of rate increases, perhaps triggering a recession. Some Fed officials are already making the case for faster increases, but Lockhart said he still felt the Fed may only need to raise rates twice this year.
• The dollar edged down for a second day on Tuesday, as cautious investors booked profits ahead of U.S. President-elect Donald Trump’s first news conference since winning office, to be held on Wednesday. The market expects that future monetary policy is dependent on what we are going to hear from Donald Trump in the next couple of weeks.
• We keep our long EUR/USD position. We think that lack of macroeconomic data in this week’s schedule could be used as an opportunity to take profit on November-December USD rally.

AUD/USD: We stay long for 0.7450

• Data from the Australian Bureau of Statistics out on Tuesday showed retail sales grew a disappointing 0.2% in November from October when they increased 0.5%. However, sales in October and November put together were 1.5% faster than the first two months of the previous quarter, bolstering hopes the economy had turned around after contracting in the July-September period. The ABS’s experimental estimate of online retail sales also jumped 10.8% in November, enjoying a fourth month of solid gains.
• The latest signs show that consumers entered the New Year in a mood to spend. A survey by ANZ and Roy Morgan out on Tuesday showed sentiment surged in the first week of January, with consumers much more upbeat about their finances and eager to buy big-ticket items.
• All the signs are the economy had returned to growth after a shock contraction in the September quarter. Figures out last week showed Australia boasted its first trade surplus in almost three years in November as surging commodity prices boosted export earnings, and likely economic growth as well.
• Tuesday’s data will provide some relief to the Reserve Bank of Australia, which has been counting on a pickup in household consumption to offset weakness in mining investment. The RBA has been playing down the need for further easing following cuts last August and May that took the cash rate to an all-time low of 1.5%. As a result, financial markets had all but given up on the chance of a further rate cut and were even toying with the idea of a hike in 2018.
• Brief consolidation period on the AUD/USD ended. A bullish outside candle is in place on daily charts and RSIs are biased up with room to run. Our target stays at 0.7450 for now.

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By GrowthAces.com – Daily Forex Trading Strategies