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Markets pushed higher after Fed decision

As expected, the Fed raised interest rates for the first time in nine years by 25 basis points to a level of 0.25% - 0.50%. Fed reported that household consumption and business investment are solid, the labor market is strong and unemployment has decreased significantly over the last year.
Fed predicts interest rates of 1.4% at the end of 2016, which alludes for four increases next year. The projections for the end of 2017 are for 2.4%, which is a minimal change from one increase less than previously forecasted.
Forecasts for GDP growth, unemployment and inflation remained unchanged or minimally revised. Inflation is expected to lead to steady growth in medium term to levels of 2%.
Overall monetary policy is expected to help further economic activity.
On foreign exchange markets the dollar remained strong this morning and pushed the euro to 1.0850 and climbed to 122.40 against the yen.
Gold retained gains after the increase in interest rates by the Fed.
Silver was traded in tandem with gold after finding good support.
Platinum is found some support from signals of increasing demand from European carmakers.

Why the US dollar will continue to rise next year

The US dollar has already marked remarkable rise against other major currencies in anticipation of the Fed's decision on interest rates. According to experts from US investment bank J.P. Morgan, however, the growth of the dollar will continue next year.

"It feels like the market is probably already paying back a little bit of its long dollar positioning… We could potentially see a little bit of a dollar pullback but probably nothing beyond 1 percent in terms of the majors," said J.P. Morgan's head of EM Asia FX strategy, Jonathan Cavenagh.

There could be some profit-taking ahead of the year-end but any decline beyond 1 to 2 percentage points presents a buying opportunity, he said.

The bank anticipates the Fed to hike rates another four times next year driven bysupply-side dynamics as unemployment and labor participants rate fall, drivingwage growth and inflation.Higher interest rates should underpin the dollar as other central banks aremore likely to provide additional stimulus.

Next year, there is upside for the U.S. dollar against Asian currencies with a"strong risk" of further devaluation in the Chinese yuan through2016, said Cavenagh.

The house is forecasting a 4 to 4.5 percent weakening of the CNY against the USD. The yuan iscurrently trading at 6.46 against the dollar, near a four and a half-year low.The Chinese central bank devalued the yuan in August to support flagginggrowth.
Other Asian currencies may face further downside risks if commodity pricesweaken or countries face domestic headwinds, Cavenagh added.

"If you look at how the growth differentials between Asia and the rest ofthe world have been performing, they have generally been narrowing, so this ismore about a reflection of what is happening in terms of the underlyingfundamentals. Next year Asia is going to attract less capital inflows etc;places like the US and Europe are going to be more attractive."

Meet CFETS RMB Index

Last Friday China unveiled  a new index of the currency in an attempt to draw the attention of market participants away from the fluctuations of the yuan against the dollar.
People’s Bank of China said that the stability of the yuan should not be measured in terms of the dollar alone. Therefore index CFETS RMB will measure the strength of the Chinese currency against a basket of trading partner’s currencies. It was introduced by Chinese forex trading system (China Foreign Exchange Trade System), an arm of the PBOC that facilitates interbank trading.

Here's what, according to Bloomberg, market needs to know about the new index:

What is it?

The CFETS RMB Index will measure the yuan’s performance against a basket of 13 currencies, with weightings based mainly on international trade, according to the PBOC. The measure has an end-2014 level of 100 as its base level and will be published regularly, it said, without providing details of frequency.

The dollar has the largest weighting with 26.4 percent, followed by the euro and the yen with 21.4 percent and 14.7 percent, respectively. The measure also includes the currencies of Hong Kong, the U.K., Australia, New Zealand, Singapore, Switzerland, Canada, Malaysia, Russia and Thailand. The U.S. accounted for 14.2 percent of China’s trade this year through November, while the European Union had a 14.3 percent share. About 95 percent of the yuan’s onshore spot transactions were against the dollar in 2014, according to a China International Capital Corp report.

CFETS will publish two other trade-weighted yuan indexes that reference performance against the IMF’s Special Drawing Rights and a Bank for International Settlements basket. The BIS-referenced gauge contains 40 currencies, while the SDR version has four.

Why now?

The Federal Reserve is widely expected to raise U.S. interest rates this week for the first time since 2006, a move that’s forecast to spur further gains in the greenback against the currencies of developing nations. The PBOC’s moves are being seen as part of efforts to ease concern about yuan depreciation and prepare the market for further weakness.

"Timing seems important" and it’s an attempt to cut the link with a strong dollar before the Fed tightens, Societe Generale SA strategists Jason Daw and Frances Cheung wrote in a note on Monday. "The PBOC is clearly preparing the market to interpret a weaker yuan versus the dollar not being devaluation."

Also, the International Monetary Fund voted to include the yuan in its Special Drawing Rights on Nov. 30, fulfilling a Chinese policy goal and giving Premier Li Keqiang scope to refocus his energies on helping revive growth in an economy expanding at the slowest pace since 1990. A weaker currency will help exports, which declined in all but two of the first 11 months of this year.

The idea of referencing the yuan to a basket of currencies isn’t new. In 2005, the PBOC said the yuan would be allowed to fluctuate against a basket of exchange rates. It just didn’t give any details of the composition and de facto pegs against the dollar during the 2008-2010 period as well as five months of this year suggested this wasn’t the case.

Yuan Implications?

It signals further depreciation against the greenback, according to yuan watchers including Goldman Sachs Group Inc., DBS Bank Ltd. and Daiwa Capital Markets. The PBOC statement is official confirmation that the currency is no longer pegged to the dollar, according to Daiwa, which has the most bearish view on the yuan with a forecast of a 14 percent decline to 7.50 versus the U.S. currency by end-2016. Goldman sees a drop to 6.60, which compares with the current spot rate of 6.4585 in Shanghai.While the yuan has retreated 3.9 percent against the dollar this year, it has advanced against 12 of 16 major currencies tracked by Bloomberg. Referencing the yuan to several currencies doesn’t mean the exchange rate is pegged to that basket, according to an article on the PBOC website written by an unidentified commentator at CFETS.

Is This Unprecedented?

CFETS said its decision to publish its own exchange-rate index is in line with international practices, and that the Federal Reserve, European Central Bank and Bank of England have theirs as well. For example, the Fed’s trade-weighed real broad dollar index suggests the greenback rallied about 9 percent in the first 11 months of this year. The Monetary Authority of Singapore manages its currency against an undisclosed basket of exchange rates.

Bank of America said the latest statement is not an explicit shift to targeting the yuan against a basket of currencies, but an implicit attempt to manage market expectations.

Spillover Effect?

Further yuan weakness could spill over to other Asian currencies, according to Bank of America, which recommends keeping a close eye on the Japanese yen, Korean won, Taiwan dollar and Malaysian ringgit. CFETS may include the won and the Taiwan dollar in its new index when there are official reference rates for those currencies, according to Khoon Goh, Singapore-based strategist at Australia & New Zealand Banking Group Ltd.

Main indices fell after oil price tumbled

European stocks plunged on Friday after the ongoing decline in oil prices has influenced the direction of major indices and they recorded the biggest weekly loss since August.

Stoxx Europe 600 fell by 2%, reaching 355.79 and thus registered a fourth consecutive losing session. Closing levels were the lowest since October until now. The overall decline of the indicator for the week was 4 percent and the weekly loss was second in a row.

The bad performance of the index this week was mainly due to the energy sector. Shares of oil and gas companies performed worst on Friday.

US crude oil was traded around seven years bottom after OPEC decided to supply a large quantity of oil, although the demand progressively decreases.

The consumer price index in Germany increased by 0.1% in November, but still remains below expectations of the ECB on inflation. Results can be justified mainly by the crisis in the energy sector.

The main US indices retreated on Friday after a fall in oil prices caused serious turmoil on Wall Street.  S&P 500 recorded its sharpest weekly decline since August, when shares fell on fears of economic retardation of China.

The hot atmosphere of the markets came shortly before the Fed to decide whether to raise interest rates for the first time in nearly a decade.

The data on US retail sales was slightly more encouraging in November, according to the Ministry of Commerce, announced Friday. It showed that the economy will continue to improve at a moderate pace over the next few months.

The index of producer prices in the US increased by 0.3% in November, but commodity prices excluding food and energy, rose only 0.1 percent.

The submitted economic data has almost no effect on Fed's decision to increase interest rates again in December or to postpone the move.

USD/CNY hit a four years low

The Chinese yuan fell on Friday to over a 4-year low against the US dollar amid increasingly lower rate set by the central bank, the country's economic slowdown and the strong capital outflow.
The pair USD/CNY is trading at 6.4553 and this is the lowest level from August 2011 onwards.

Earlier Friday, the People's Bank of China (PBOC) had set the mid-point for the yuan at a new four and a half year low of 6.4358, down 0.2 percent from Thursday's fixing.
China's central bank lets the yuan spot rate rise or fall a maximum of 2 percent against the dollar relative to the official fixing rate.

Nomura's Craig Chan said the moves are in line with policymakers' repeatedly stated ultimate goal of a more market-determined exchange rate.

"There really isn't much perceived intervention in the markets," he said at a press conference Friday. Chan believes that the reason the yuan is being allowed to decline now, when the market mechanism shift was officially made in August was due to concerns over whether some debtors would struggle with external debt if the currency declined. 
In the intervening months, PBOC data has indicated substantial hedging activity and concern over external debt has subsided somewhat, he said.

Even with the declines, "our view is the currency is still over valued.They want to move closer to fair value, which we perceive to be around6.80," for the dollar-yuan pair, Chan said. Nomura expects the currency pair will hit that level by the end of 2016.

 Just to remind that the gross domestic product of China slowed to 6.9 percent in the third quarter of 2015, not being able to meet the target of 7 percent, fueling fears that the country's economy will fail to grow at the desired pace after years of explosive expansion.

Australia’s unemployment fell to lowest level in 20 months

Australia’s unemployment rate fell to 20-month low in November, following the strongest two-month period of job growth in 28 years.
Unemployment dropped to 5.8%, while analysts forecasted a rise of 5.9% to 6%.

According to the Australian Bureau of Statistics, the total number of people with new jobs increased to 71 4000 in November and another 56 000 in October. Full-time employment is increased to 41 600, while the number of part-time jobs is up by 29 7000.

The Australian dollar spiked back above US73c on the news before falling back slightly to US72.86 at 5pm AEDT.

The employment figures represent the strongest two-month period of jobs growth since December 1987 and January 1988 and indicated that the Australian economy was coping better than expected with the end of the mining investment boom.

However, analysts cautioned that the data was volatile and noted that the ABS said that 52 700 of the job gains were due to a rotation in the groups of people being sampled for the monthly reading.

The jobs market seemed nevertheless to be strengthening, economists said.

“Even allowing for (the rotation of those being sampled), there was some improvement in hiring versus market expectations of a modest correction,” said Kieran Davies, Barclays chief economist for Australia.