Talking Points:
- Dollar Suffers First Two-Day Drop In 7 Weeks Before Fed
- Euro Traders Should Be Cautious as Currency Extends Rebound After Greek Election
- British Pound Climbs after UK GDP Posts Strongest Growth Pace Since 2007
The Dow Jones FXCM Dollar Index notched its first two-day decline in seven weeks with Tuesday’s close. However, that shouldn’t be taken as a particularly ominous sign. The fact that the benchmark currency has managed to charge such a persistent advance over such an extended period is impressive. Furthermore, a modest pullback is more than reasonable given the position of the currency and the event risk that lies ahead. For the Greenback, we are only a few days away from closing out a seventh consecutive monthly advance – that would be the first in the US Dollar’s and ICE Dollar Index’s histories. Given that singular drive, a modest breather is warranted heading into a critical Federal Open Market Committee (FOMC) meeting.
As far as central bank policy decisions go, the Fed’s first gathering of 2015 isn’t inherently crucial. This isn’t one of the quarterly events where we are issued updated forecasts (inflation, employment, interest rates) and Chairwoman Janet Yellen holds a press conference. Nor is it likely to be a definitive turning point in policy like the end of QE3 last year or the announcement of the first rate hike. Instead, this event is made extraordinary by the context of the broader market. These past few weeks, we have seen the ECB introduce a massive QE program, the BoJ downgrade its inflation outlook (which could lead to another stimulus upgrade), the BoC surprise with a rate cut and other central banks either make clear dovish shifts or come under pressure from unfavorable data. That puts the onus on the US central bank. Does the world’s largest player support its global counterparts – and indirectly support investor sentiment – by offering up rhetoric to push out the timing of the first tightening effort? Or, will the Fed keep its rate bearing on a divergent course to the G10 and potentially undermine ‘moral hazard’?
Euro Traders Should Be Cautious as Currency Extends Rebound After Greek Election
The Euro has rallied hard over the opening two trading days of this week. In fact, EUR/USD has posted its biggest two-day with Tuesday’s close since September 18, 2013. Having dropped nearly 20 percent over the past nine months, that may seem overdue; but the catalyst for the correct is remarkable. Over the weekend, Greece put anti-austerity party Syriza in charge of the government. And, though the situation didn’t immediately deteriorate into a Eurozone crisis like that of 2010; the country and Eurozone are clearly on a collision course over the Greece’s onerous debt load. Syriza leader Alexis Tsipras ran on a campaign of pushing back against the harsh rescue requirements the Troika attached to its bailouts over the past five years – and he has not backed down from that drive after winning the office. So far, he has appointed an anti-austerity leaning board and halted the privatization of the Greece’s largest port (Pareaus port). Meanwhile, other Eurozone leaders have made it clear that no haircuts or debt forgiveness are on the agenda. The ECB’s QE program may offer some reprieve for the region, but a revived sovereign crisis is not something it can ‘solve’. Euro investors should remain on their guard.
British Pound Climbs after UK GDP Posts Strongest Growth Pace Since 2007
Top event risk this past session amongst the majors was the United Kingdom’s 4Q GDP release. Through the final three-month period, the pace of growth cooled with a 0.5 percent expansion; but this doesn’t look like a full stall of the country’s economic boom over the past few years. We can see the momentum is still robust when we refer to the annual pace of 2.7 percent –the most vigorous since 2007. For the Sterling, the news supports expectations of a BoE hike sometime this year which helps offset the dovish tone in the minutes from last week. The currency did gain traction against most counterparts this past session, but neither swaps more Short Sterling futures have turned a corner on rate forecasts.
New Zealand dollar More Potential from RBNZ than Dollar to Fed?
There is little doubt that the Fed rate decision will be an important event risk for the US Dollar whether the event tips dovish or hawkish. That said, the RBNZ’s own policy meeting is likely to exact a heavier toll on the New Zealand Dollar. At the last policy decision, Governor Wheeler tacitly approved of the market’s policy expectations at that time – a hike sometime in the first half of 2015.Since then, however, market-based rate forecasts have plunged and were exacerbated by last week’s weak 4Q CPI. There is far more chance of a dramatic NZ policy surprise.
Australian Dollar Rallies…as Inflation Cools?
The 4Q Australian CPI data weakened from the previous quarter this morning…and the Aussie dollar rallied. There was a slightly better-than-expected outcome for the core-equivalent reading, but it was still on a slowing trajectory. Yet, with this data, there is a tangible, data-derived reason why the RBA may not need to cut rates. Before this data, swaps were pricing in a 44 percent chance of a cut next week. After, it’s 17.
Emerging Markets Slide as PBoC Injects Liquidity, Singapore Loosens Policy
The MSCI EM ETF was modestly lower this past session, but the rally that peaked last week seems to have confirmed its lost momentum. Whether or not that retreat accelerates or not will rely heavily on the Fed’s outlook. Meanwhile, this past session, the Chinese Yuan gained ground after the PBoC used reverse repos to pump liquidity into the market and the Singapore Dollar dropped after the MAS eased policy.
Gold Bugs Ask ‘Where Does the Fed Stand in the Great Currency War’
We have seen an almost universal, dovish shift from central banks these past week. And through that transition, gold has gained on its anti-currency war appeal. Yet, despite Eurozone QE and other efforts directed at cheapening fiat currencies, the precious metal has struggled to overtake $1,300. A critical fuel additive is needed to extend this drive – a Fed that kills any hope/risk of higher yields that will weigh gold.