Dollar Dumped as Dudley Dovish

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Market Drivers May 12, 2015

Dudley casts doubt on rate hike in September sending EURUSD through 1.1250
UK IP/MP comes in better than expected
Nikkei 0.02% Europe -2.21%
Oil $59/bbl
Gold $1184/oz.

Europe and Asia:
AUD Home Loans 1.6% vs. 1.1%
GBP UK MP/IP 0.4% vs. 0.3%

North America:
GBP UK GDP Estimate 10:00

NY Fed chief Bill Dudley cast some doubt on the notion the Fed was ready to raise rates in September sending EUR/USD soaring to 1.1275 in morning London dealing as traders reacted to his comments. Speaking in Zurich, Mr. Dudley stately flatly, “ I don’t know when the Fed will hike rates,” suggesting that the FOMC was not committed to a timeline despite the fact the US job growth has been consistently positive at 200K new hires per month for a considerable period of time.

Mr. Dudley’s comments indicate a sense of reluctance on the part of FOMC members to normalise monetary policy at a time of uncertainty and slowdown in the global economy. Although the ongoing saga with EZ and Greece appears to be a sideshow for now there is still some slight possibility that it could turn into a systemic risk and the Fed is likely watching the events cautiously to ascertain the risks to the global economy and more importantly to not exacerbate any turbulence in the markets with an ill timed tightening move.

The immediate impact of the Mr. Dudley’s remarks was a rush to the EUR/USD which saw a short covering rally that pushed the pair towards the 1.1300 level as the European morning wore on. The single currency also got a boost from the news that Greece made its IMF payment today, although the country’s finances remain in a highly precarious state and it will face a moment of reckoning later this month if Mr. Tsipras and company can’t come to terms with the EZ member nations on a bailout deal.

Elsewhere. the Aussie got a boost from it budget report that projected a peak deficit of 18% in 2016/17 year cycle that eventually declined to 7.1% of GDP by year 2025. The budget cut AU growth to 2.75% from 3,00% next year but that seems optimistic given the forecast drop in mining investment of 30% and 25% in 2015 and 2016 respectively.

Australian fiscal authorities appear to be counting on a massive rebalancing in the Australian economy from mining to services in order to make their projections stick. In any case the markets liked what they heard and AUD/USD climbed steadily higher approaching the 8000 level ahead of the North American open.

With no data on the docket in US it will be interesting to see how the markets react to overnight flows. Recently US session has tended to reverse many of the gains made in Asia and Europe and if US yields continue to creep up the buck may find a bid again. One of the more remarkable developments over the past several weeks has been the divergence between fixed income and the currency markets. Fixed income markets have show a consistent tightening of the curve with 10 year now well above the 2% mark at 2.34% – yet FX has failed to follow with USD/JPY moribund at 120.00 while EUR/USD remains stubbornly bid. Eventually this disconnect will have to resolve and given the fact that fixed income markets are generally better forecasters of the economy that means the dollar rally will likely resume.

Boris Schlossberg
Managing Director

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