Dollar Crucified By Uncertainty Over Central Bank Actions

The US dollar was taken apart yesterday evening by a concerted and determined move that highlighted the fragile nature of the recent rally in risky assets. There is no real single reason for the move but a timeline of the slash lower goes like this:

Yesterday’s ECB meeting was a bit of snooze-fest in so much that policy remained unchanged. Once again, however, it was what Draghi hinted at in the press conference that set fire to things. The euro started to rally through the afternoon session, after it became clear that the previous meeting’s chatter around negative deposit rates was mere bluster as opposed to actual policy. We have also seen a few banks’ analysts reassess their expectations of further ECB rate cuts through the end of the year with more agreeing with us now that 0.5% is the lowest they will go.

The lack of dovish chatter from the ECB saw emerging market bonds sell-off dramatically through the afternoon as the market became doubtful as to where the free money that has made this market tick for years would now come from. The Fed may taper, the Bank of Japan may have already done too much in its eyes. The ECB was the only bank to help and all they got was a slap from Draghi.

The biggest mover in G10 currency markets over the past 6 months has been the JPY and it was here that the market chose to express its unhappiness with the situation. USD/JPY had its biggest down day since May 2010 with the ensuing USD weakness sending GBP/USD, EUR/USD and basically everything against the dollar rocketing through technical levels aplenty.

The movements were reminiscent of 2008 and, akin to that time period, the likelihood of further volatility is very high. It seems an almost perfect storm for USD in so much that today is payrolls Friday. The market’s expectation is for 165,000 jobs to have been added in May but, participants in yesterday’s webinar will know that the relationship between the USD and jobs can easily be reset by a large miss today.

Anything between 140k and 180k will only muddy the waters and we would expect a continuation of recent trends whilst anything north of 200k should see a neckbreakingly quick reversal and USD strength.

Nothing else matters today and we would suggest that USD buyers speak to their dealer for an idea of how to hedge these prices successfully.