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In early December, 2015, the US Dollar index reached 100. The composite index basket includes Sterling, Yen, Euro, CHF, SEK and CAD. It remained at elevated values until early February, 2016 when it declined about 7.33% in early May and has since recovered a bit. This is the ‘appreciation of the foreign exchange’ the FOMC referred to above which affected export demands. However, the Fed is not obligated to take into account currency exchange relationship with major trading partners; although it’s reasonable to conclude that they do to some extent. During the period in which the Dollar index saw its 2016 best in early January, both the ECB and BOJ have taken actions which should have weakened their currencies vs the US Dollar. Further, the BOE has said it is prepared to act in the event of a negative market reaction to the 23 June Brexit vote. The ECB and BOJ actions have had little effect on their respective dollar exchanges but now the US Dollar might have more potential to gain should the Fed act in a way that would strengthen the Dollar; i.e., raise the Fed Funds rate.

The point is whether or not the Fed would risk strengthening the Dollar after it had specifically referred to the strong Dollar as a reason for the decline export demand, especially when it correlates with a slowdown in manufacturing.

Automobile sales have also been a major component supporting the US economic recovery over the past few years. Importantly, though, there has been an increasing reliance on extended duration auto loans driving these record setting sales, many up to 72 months and some 84 months7 . The popularity of long duration auto loans may indicate consumers are finding ways to adapt to those moderate gains in wage compensation; lower monthly payments mean more flexibility with monthly income. The FOMC made a further observation on the US auto industry: “...Automakers’ assembly schedules and broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, mostly pointed to only modest gains in factory output over the next few months...”

It’s reasonable to assume that the strong consecutive year over year gains in automobile sales has run its course. Thus the risk of increasing lending rates, even by a small amount, might amplify a normal decline after an exceptionally good cycle.

Lastly, the Fed also made note of the demise of the US petroleum industry: “...Information on extraction and drilling activity for crude oil and natural gas in early April was consistent with further declines in mining output...”

As noted in a recent Reuters8 article “...The rout in crude prices is snowballing into one of the biggest avalanches in the history of corporate America, with 59 oil and gas companies now bankrupt after this week's filings for creditor protection by Midstates Petroleum and Ultra Petroleum...” The boom years had attracted thousands to the US mid-west oil fields. Now the bust is having serious repercussions on local economies9 and might extend into the broader economy.

The point of the matter is this: As it must the FOMC carefully questions the ability of the economy’s ability to handle an increase in benchmark lending rates. A 25 basis point increase in the base rate would result in modest across the board loan rate increases. The question is that if they do, are they loading the last straw on the camel’s back?

Summing up, it seems unreasonable for anyone to emphatically conclude there’s a strong likelihood of a Fed rate increase in June.

There’s one last critical point definitely worth mentioning: The next meeting of the Federal Open Market Committee is just one week before the Brexit vote.

There are two potential volatility trades: USD/JPY and GBP/USD.

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