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Contributors Forex: Dollar Posts Biggest Rally in 6 Months after FOMC

Talking Points:

  • Dollar Posts Biggest Rally in 6 Months after FOMC
  • British Pound Gets the Go Ahead to Advance from BoE
  • Euro’s Period of Quiet May be Running Out

Dollar Posts Biggest Rally in 6 Months after FOMC
The Dow Jones FXCM Dollar Index (ticker = USDollar) – facing the close of a tight trading range – found an explosive breakout on the back of the FOMC rate decision. A breakout was a practical necessity, but the severity of the dollar’s rally reflects upon a fundamental event that can engage the currency and broader capital markets moving forward. For USDollar, the news of the third $10 billion Taper and traders’ interpretation of a more timely return to a rate hike regime for the Fed translated into the index’s biggest single-day rally in six months.

For the majors (USD-based pairings), the gains were universal; but the technical moves were more significant where the monetary policy differences were starkest. With the Aussie dollar still stuck with a dovish label and the BoC Governor warning rate cuts were still an option this week, both AUDUSD and USDCAD dove 0.9 percent. Yet, some of the more dramatic moves came where the monetary policy competition was more substantial. EURUSD – levitated by the ECB’s balance sheet reduction – reversed from a multi-year high that was locked on 1.4000.

Measuring the greenback’s performance versus its counterparts and taking note of the limited ‘risk’ response from the Fed event (via equities, yen crosses, emerging markets and other benchmarks), we can ascertain the market’s assessment. The third consecutive $10 billion Taper (bringing monthly purchases to $55 billion) was expected, and the statement’s note of “sufficient underlying strength” for the economy maintains expectations of a QE3 close by September or December.

In the early stages of the yield and carry return, the FX market will favor early adopters that are backed by liquidity and growth. That is where the Pound and Euro have found much of their strength over the past months. Yet, the Fed has recalibrated the market’s estimation for the US with this FOMC meet. In addition to forecasts for economic benchmarks, the central bank has also updated its rate outlook. The median forecast amongst officials now sees the benchmark rate at 1.00 percent by the end of 2015 (previously 0.75) and 2.25 percent in December 2016 (previously 1.75). Much was also made out of Chairwoman Janet Yellen’s response in the Q&A that a ‘considerable’ time for the Fed to wait after the end of the QE program – mentioned in the statement – may be 6 months. Fed Fund futures are pricing a June 2015 first hike.

British Pound Gets the Go Ahead to Advance from BoE
Though the FOMC decision has received the bulk of the global FX headlines this past session, the UK’s docket was brimming with event risk. The most definiterelease was the February labour data. The 34,600-filing drop in jobless claims was larger than expected and the January ILO jobless rate held at 7.2 percent – just above the 7.0 percent target the central bank initial laid out in its forward guidance. This adds a little buoyancy to rate expectations which have been buoyed since BoE Governor Carney took the reins last summer, but it doesn’t move forward the timeline like the Fed did. Far more interesting was the BoE minutes. The group noted that the recovery was not balanced and that inflation was curbed by the sterling’s strength. These are the same concerns that the ECB noted at its last meeting, but the threat of a policy move due to the pound didn’t take. The transcript also said explicitly that there was risk of further pound gains as the economy recovered.

Euro’s Period of Quiet May be Running Out
The Euro does well in quiet market conditions. If global capital markets avoid volatility and European headlines don’t trumpet the return of a regional crisis hotspot, the ECB’s balance sheet will steadily decrease and market rates will rise. That has proven a considerable boon for the shared currency, and both sovereigns and corporate members have taken advantage. Bailout recipients have returned to the market, reserve capital is returning and investors are still trying to draw out yield. Yet, all of these benefactors are at risk should volatility return.

Japanese Yen Crosses Defy Equities, Did Kuroda Issue a Warning?
While the Nikkei 225 has followed in the S&P 500’s footsteps this morning, the yen crosses are generally higher over the past 24 hours. The shift forward in the Fed’s return to rate hikes doesn’t seem to carry as much prominence for ‘risk’ trends. Meanwhile, traders should take note of BoJ Kuroda commentary this past session whereby he said much of the yen’s excesses were reduced last year. Is that growing reticent to boost QE?

Swiss Franc: SNB Has to Consider ECB Moves in Policy Meeting
The Swiss National Bank (SNB) is set to deliberate on monetary policy this morning. While I have typically written off this event over the past few quarters, there storm clouds building on the horizon that the central bank may need to account for. In particular, EURCHF has begun a retreat towards 1.2000 once again – despite the euro strength – and there are real expectations of further easing from the ECB.

New Zealand Dollar Slips Despite In-Line 4Q GDP Report
Growth in New Zealand cooled through the fourth quarter, but the 0.9 percent expansion was still robust and in-line with economists’ consensus. Yet, it seems that meeting expectations wasn’t what the market was looking for. NZDUSD dropped 30 pips after the data crossed the wires and the kiwi is down across the board this morning. According to swaps, there is still a 94 percent chance of an RBNZ follow up hike next month.

Emerging Markets: Fed’s Withdrawal of Easy Money Weighs Where Crimea Hasn’t
Some of the loudest protestations against the Fed’s downshift in its QE3 program have come from the Emerging Markets. The region has benefit from the global growth and heavy foreign investment founded on the cheap funding of central banks like the FOMC. With the third Taper this past session, the MSCI Emerging Market ETF dropped 2 percent on heavy volume.

Gold: A Fourth Consecutive Drop Would Snuff the 2014 Bull Trend
A Taper is yet another downshift in the flood of liquidity that has watered down the general appeal of ‘fiat’ assets around the world. As a favorite alternative to ‘currency’ and the dollar in particular during the heights of the stimulus ramp, the precious metal didn’t take too well to the FOMC. Gold has now put in for only its second three-day decline of 2014. Another decline and this can more seriously change our trend.





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