Dollar Bulls Rejoice, Top 3 Takeaways from Yellen

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Daily FX Market Roundup 07.15.15

**No Daily on Thursday and Friday

Dollar Bulls Rejoice, Top 3 Takeaways from Yellen

CAD Crushed by BoC Rate Cut

NZD Hit Hard by Largest Drop in Dairy Prices in 3 Months

AUD Shrugs Off Stronger Chinese Data, Focuses on Chinese Stocks

EUR/GBP Closes in on 7 Year Lows

Dollar Bulls Rejoice, Top 3 Takeaways from Yellen

The U.S. dollar traded sharply higher against all of the major currencies today on the back of hawkish comments from Janet Yellen and better than expected U.S. data. Here are the 3 most important takeaways from Yellen’s testimony this morning:

1. September rate hike is still on the table – Yellen says “Every FOMC meeting is a Live meeting”

2. The Fed is optimistic on the economy and jobs. Yellen “expects growth to strengthen over rest of 2015”

3. Fed doesn’t’ want to wait much longer because “waiting longer might mean faster rate rises”

Not only did Yellen confirm that rates will rise this year but it is her view that waiting too long would mean rates would have to rise at a faster pace later. She prefers to start earlier to allow for a more gradual rate path. As a result every FOMC meeting this year including September is a live meeting at which the central bank could raise rates. There’s also no stopping the Fed from calling an impromptu press conference after any meeting. Even with the Greek situation and China’s challenges, Yellen is optimistic. She sees a favorable outlook for improvement in jobs and the economy. She expects the recovery to gain momentum as headwinds fade and look forward to stronger growth over the rest of 2015. There are already signs of stronger spending according to Yellen with the sharp rise in May and June car sales. More importantly, there are signs that wage growth is increasing and it is expected to gain momentum as the economy improves.

Once again, Yellen stressed that the pace of policy tightening is more important than the timing of liftoff. We view this as her way of telling us that September is still on the table for a rate hike. Gradual policy tightening is their preference and starting September would give the market and the economy the opportunity to slowly absorb the move. Of course, the Greece crisis has not had a significant impact on U.S. markets so far but if that changes so could her views. In the meantime, we expect further gains in the dollar. Given the rise in industrial production and the Empire State manufacturing index, we are looking for upside surprise in the Philadelphia Fed survey.

CAD Crushed by BoC Rate Cut

USD/CAD soared to its strongest level in 6 years after the Bank of Canada lowered interest rates by 25bp to 0.5%. Judging from the 1% broad based decline in the currency the move was unexpected but our readers and BK members have been positioned for a cut and rode the move lower in the Canadian dollar. According to the BoC, the rate cut was necessary because of the increased downside risks to Canadian inflation and the slowdown in growth. The central bank believes that the Canadian economy contracted modestly in the first half of the year and as such lowered their 2015 GDP forecast substantially – from 1.9% to 1.1%. For 2016, they expect the economy to grow by 2.3% versus a previous forecast of 2.5%. The economy is not expected to return to full capacity until 2017. As for inflation, the underlying estimate is now 1.5% instead of 1.7%. The decline in oil prices played a major role in these downgrades and the central bank’s decision to cut rates. While the BoC expects the U.S. economy to strengthen, they are puzzled by the weakness in exports and expect the Canadian economy to be less in sync with the U.S. While BoC Governor Poloz said they have a fair bit of room to maneuver and more tools in the toolkit, he also believes it will be unnecessary to take more action in September. We believe that the chance of additional easing from the BoC this year is small and therefore expect further losses in the Canadian dollar to be limited. Meanwhile the New Zealand and Australian dollars also came under heavy selling. With dairy prices falling another 10%, the largest decline in 3 months, the RBNZ is widely expected to lower interest rates next week. As we suspected Chinese economic data was better than expected with GDP growth holding steady at 7% but this increase failed to help Chinese stocks, which resumed their slide taking the Australian dollar down with it. There are no major economic reports from the 3 commodity producing countries tomorrow outside of New Zealand’s second quarter CPI and business PMI reports.

Euro: STILL Waiting on Greek Parliament

By now it should surprise no one that at the time of publication we are STILL waiting on Greece. The deadline for the Greek Parliament’s vote on the reform proposals was supposed to be midnight and now there’s talk that it may not happen until tomorrow. In response, investors have taken the euro lower. We have long said that the risk of a no vote is a realistic one and even if they accept the proposals, it only allows new debt negotiations to begin. The debt negotiations could still turn sour especially after the IMF indicated that they cannot participate in a new bailout without debt relief for Greece – a point that the Germans have resisted aggressively. So the talks could break down again and for this reason we remain bearish euros. Tomorrow’s Eurozone trade and consumer price reports will take a backseat to the ECB meeting and Greek Parliament vote. If the Parliament votes yes, we expect EUR/USD to rally at which point we will sell into the rally looking for a pullback as the debt negotiations resume. With Europe still struggling to contain the Greek crisis, we expect cautious and dovish comments from the ECB.

EUR/GBP Closes in on 7 Year Lows

Sterling ended the day unchanged against the U.S. dollar and sharply higher versus the euro. In fact the outperformance of sterling versus the euro took EUR/GBP within 4 pips of its 7 year low. As reported by our colleague Boris Schlossberg, “UK Claimant count rose for the first time since 2012 putting a dent into the pound rally in early London trade today, but the pair held above the 1.5600 level buoyed by recent hawkish talk from the MPC. UK claimant count rose to 7.0K from -8.9K eyed while the unemployment rate increased to 5.6% from 5.5% forecast. Even average wages earned missed their mark printing at 3.2% vs. 3.3% – but were still considerably better than the 2.7% the month prior. The labor data shows a slight slowdown in UK demand but the market appeared unconcerned especially since wages continued to rise at healthy pace. Perhaps the most surprising aspect with respect to cable this week was decidedly hawkish turn in rhetoric by various MPC members. Yesterday BoE Governor Mark Carney stated that rate hikes were coming sooner rather than later and that bombshell was followed by speech from the usually dovish Miles who went out of his way to note that BoE did not need to follow the Fed and could establish its own path towards rate normalization. The central bank talk has given sterling just the boost it needed and the pair is now squarely back in the uptrend having made a higher low at the 1.5400 figure.” The pair still faces stiff resistance at 1.6000 and we’ll know more about how close the BoE is to raising rates after next week’s MPC minutes.

Kathy Lien
Managing Director

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