Dollar: When will the Market Start Pricing in the First Fed Hike?
The Dow Jones FXCM Dollar Index only lost modest ground to open the new week, but that didn’t prevent the benchmark from closing out its sixth consecutive decline. Already in the red early this morning, the greenback is working on its longest bear trend since the final trading days of 2010. Such a persistent selling pressure following the failure of the convincing bullish bias from late October is an ominous portend ahead of Tuesday’s top event risk: Janet Yellen’s first Congressional testimony on monetary policy as Chair of the Federal Reserve. The tangible shift in the central bank’s policy bearings with the Taper move starting December has failed to generate a serious bid for the dollar. What would happen if the new Central Bank head employed some effective, dovish jawboning?
We have every reason to believe that Ms. Yellen will look to avoid stoking just-calmed market volatility by deviating from the policy expectations the group has crafted on over the past year. However, there are points on which some level of clarity is a necessity and others where heavy speculation may warrant a response from the markets regardless of the outcome. Looking past the comment-by-comment interpretation of her remarks and responses for some frivolous effort to project all policy moves going forward – she is likely to retain the democratic policy approach Bernanke adopted and has supported both Taper votes in-line with the majority – there is value in using this opportunity to update forward guidance. At the press conference following the FOMC decision this past June, Bernanke introduced unemployment targets and timeframes for ending QE3 (7.0 percent by mid-2014) and the revival of rate hike discussions (6.5 percent by the first half of 2015). With the jobless rate at 6.6 percent, the market will be looking for clarification.
As we dissect each perceived course adjustment by the Fed, it is important to keep the big picture in mind. The central bank has set a Taper path that officials have stated is the ‘default’ course moving forward. While this isn’t a tightening effort in a traditional sense, it has lifted yields for the US and bolstered the currency’s competitiveness. Ultimately, the interest is in yield forecasts – pinpointing when the regime will turn to rate hikes and generate meaningful returns. The same theme has conferred serious strength to the sterling over the past 8 months. In a Fed paper released by a senior economist with the group (Jens Christensen), it was proposed that the yield curve is pricing in a 50-50 chance of a Fed rate hike by March 2015. Depending on Yellen’s remarks, that time frame may shift measurably this week.
Euro Uncertainties Build As Concerns Rise, Spanish Banking Review Due
Though its performance has proved somewhat uneven these past weeks, the euro is working on its fifth consecutive daily rally against the dollar – the longest EUR/USD run in two months. This pair no doubt capitalizes on the dollar’s own shortcomings, but there is a certain strength to the shared currency that shines through on pairs like the EUR/JPY and EUR/GBP. Yet, this backdrop should come with a caution sign. While the region’s fundamental stability has indeed improved since the depths of the Eurozone sovereign-financial crisis; the capital drive shifted from rebalance to speculative target some time ago. Monday, we were reminded of the uncertainties that remain. Of particular interest, the head of the Single Supervisory Mechanism (SSM) suggested bank failures were a necessary part of the ongoing stress tests for credibility.
British Pound Coiled Like a Spring Before BoE Guidance Update
Looking at GBP/USD or EUR/GBP, we can easily see the tension in the sterling pairings. The technical picture looks like one primed for near-term breakouts, and that aligns nicely to the fundamental picture. Wednesday’s Quarterly Inflation Report from the Bank of England (BoE) is the most worthy piece of event risk we have seen for the pound in months as it looks to reconcile a fundamental disagreement between the market and central bank on rate forecasts. Until the position is clarified though, we have tension.
Yen Crosses at Mercy of Risk as BoJ Still Lacking for Jawboning
Risk trends have tendered the yen crosses a diminishing support over the past months by both presenting a cap on the risk advance as well as losing traders’ general conviction. Furthermore, the fundamentals are starting to fall apart on the efficacy of monetary policy as a driver. Despite the yen’s depreciation through 2013, the country racked up its biggest deficit on record. The yen crosses need more QE expansion threats.
Australian Dollar Hits 0.9000 But Beware False Breakouts
The AUD/USD nudged 0.9000 for the first time in five weeks this morning following a mild bounce in equities and a round of encouraging numbers from second tier economic data. Investment lending for December, business confidence for January and housing prices for 4Q all showed growth. Yet, continuation for this benchmark pair and most Aussie-crosses needs something more substantial to turn the tide.
Canadian Dollar Looks to Wrest Strength from Budget Update
Data for the Canadian dollar has vacillated over the past two active trading days. On Friday, January employment figures showed a 29,400-job increase in national payrolls that pulled the unemployment rate down to 7.0 percent. Though, on Monday, housing starts fells faster than expected and a consumer sentiment survey dropped to a 9-month low. Today, Finance Minister Flaherty will introduce the budget.
Emerging Market Breakout Fails for Immediate Follow Through
The most news worthy Emerging Market currencies posted modest gains on official exchange rates Monday - the Argentine peso led the charge with a 0.4 percent advance versus the dollar.That said, the momentum skewed to the bearish side. The Brazilian Real dropped 1.3 percent while the South African Rand fell 0.7 percent. The MSCI EM ETF pants the picture with a 1.1 percent plunge that has quickly broken the bull run.
Gold Moves to 8-Week High, Speculative Positioning Slips for the First Time in Same Period
With Monday’s close, spot gold rose for a fourth consecutive day and subsequently earned its highest close since November 19. While the metal’s gains have proven slow, they are nevertheless consistent – much like the dollar’s losses. Looking to futures, open interest has attempted to bottom out a five-month lows and net speculative futures long interest reported its first drop in 8 weeks.