Dollar Soars as End of ZIRP in Sight

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Daily FX Market Roundup 03-19-14

Dollar Soars as End of ZIRP in Sight

EUR Falls to Lowest Level in Nearly 2 Weeks

GBP: Supported by Strong Labor Market Data

CAD Hits 4 Year Lows Versus USD and EUR

NZD: Potential Upside Surprise in Q4 GDP

AUD: Economic Data Remains Weak

JPY: BoJ Kuroda Says Hurdle High for More Easing

Dollar Soars as End of ZIRP in Sight

It is always refreshing to see currencies, equities and Treasuries respond the same way to the FOMC rate decision because it means that the Federal Reserve left investors with a very clear message. Today, Janet Yellen began to set expectations for tightening. Bernanke went to lengths to make it known than tapering does not equal tightening but Yellen spoke about how and when rates will be increased. In fact there was an entire new paragraph dedicated to how the central bank will approach the removal of policy accommodation and what sent stocks plunging and the dollar soaring was Yellen’s comment that the first rate will most likely be 6 months after Quantitative Easing ends. If the Fed maintains its current pace of tapering, asset purchases will cease in the fall, which means that the first rate hike will be in the summer of 2015. This timing is consistent with the forecast of Fed officials, 80% of whom expect the first rate rise next year. The fact that Janet Yellen is talking about rate hikes at all in her first meeting as Federal Reserve Chair is extremely bullish for the dollar and providing specifics on timing gives investors a target to look forward to. With the end of ZIRP now in sight, we expect further gains in the dollar and yields. The 2014 GDP downgrade was completely overshadowed by Yellen’s less dovish comments and in terms of forward guidance, the central bank dropped the 6.5% unemployment rate threshold and reverted to the existing language in the statement. These are the Top 10 Takeaways from the FOMC statement:

My Top 10 Takeaways from FOMC Statement

1. Initial read of FOMC is hawkish – Dollar and Yields Soar

2. Fed reduces monthly bond purchases by another $10B, rates unchanged

3. 6.5% Drops Unemployment Rate Threshold

4. Qualitative Guidance takes form of “Wide Range of Information” including employment, inflation and financial mkt developments

5. Kocherlakota Dissents on Switching to Qualitative Guidance

6. Fed Downgrades 2014 GDP forecast, Upgrades 2015, 2016 GDP forecasts

7. Fed Raises Core Inflation Forecasts

8. Lowers 2014 Unemployment Rate forecast to 6.1%-6.3% range from 6.3%-6.6% range

9. 13 out of 16 Fed Officials see First Rate Rise in 2015, 2 in 2016

10. First Rate Hike to Come About 6 Months after QE Ends – June 2015?

EUR Falls to Lowest Level in Nearly 2 Weeks

With no major Eurozone economic data released today, the sell-off was driven entirely by demand for U.S. dollars. Traders should expect this to remain the case over the next 24 hours because the market’s appetite for dollars will most surely overshadow the German producer price report. The euro has fallen to its lowest level in nearly 2 weeks and is vulnerable to a deeper slide below 1.32. The Swiss National Bank has a monetary policy announcement tomorrow and they won’t be happy to see the recent appreciation of their currency. The recovery in the economy has been extremely slow and according to the latest economic reports, there have been further setbacks. Inflationary pressures grew at a slower pace last month and in January retail sales growth slowed to 0.3% from 2.5%. In response, the State Secretariat for Economic Affairs downgraded their GDP forecast for 2014 from 2.3% to 2.2%. Therefore we expected the SNB to maintain a dovish outlook tomorrow and remind investors that they remain committed to defending the 1.20 EUR/CHF peg. Before the SNB rate decision, Swiss trade numbers are also scheduled for release and given the recent moves in the currency, we expect weaker trade activity.

GBP: Supported by Strong Labor Market Data

While the British pound traded lower against the greenback because of dollar strength, it performed well against all other major currencies. In fact better than expected labor market data made sterling the second best performing currency today. According to our colleague Boris Schlossberg who wrote an extensive note about the data “the UK claimant count printed at -34.6K much better than the -25K eyed as unemployment rolls were reduced further. The prior reading was upgraded as well to -33.9K from -27.6K initially reported. The unemployment rate remained steady at 7.2%. Overall, this was another very impressive report made more so by the rise in average wage earnings which increased by 1.4% versus 1.3%. The rise in wages continues to lag the rise in inflation but both gauges are moving in the right direction with wages increasing while inflation continues to decline. That dynamic should prove supportive to cable bulls who are betting that the BoE will be the first G-7 central bank to hike rates in more than 5 years.” Meanwhile the Bank of England minutes contained very little new information aside from concerns about the negative impact of sterling strength on inflation. While the BoE could be the first to raise rates, it is clear that they are in no rush to do so.

CAD Hits 4 Year Lows Versus USD and EUR

The Canadian, Australian and New Zealand dollars sold off aggressively today on the back of the FOMC rate decision. Investors cared little about relative monetary policies they just sold everything in sight. The CAD was the worst performer but AUD and NZD were not far behind. The loonie dropped to its lowest level in 4 years against the U.S. dollar and euro. Between yesterday’s dovish comments from the Bank of Canada and Finance Minister Flaherty’s surprise resignation, investors have found more reasons to sell the currency. The central bank thinks the outlook for Canada’s economy is troubling and Flaherty, one of the most respected and powerful members of the Canadian government who played a large role in steering the economy through the financial crisis will be difficult to replace. Economic and political uncertainty in Canada has and could continue to drive the Canadian dollar lower especially as the gap widens between U.S. and Canadian monetary policy direction. Retail sales and consumer prices from Canada are scheduled for release tomorrow and even if the data surprises to the upside, the rebound in the loonie could be limited. Meanwhile we expect the New Zealand dollar to rebound because even though U.S. yields increased significantly, New Zealand is still further along in the process of policy normalization than any other economy. Also, milk, cattle and beef prices are the rise, which will not only contribute to stronger profitability for New Zealand farmers but also put pressure on the RBNZ to continue tightening. Economic data remains strong with the current account balance narrowing significantly in the fourth quarter. We have Q4 GDP numbers scheduled for release this evening and while economists are looking for a slowdown in growth, stronger retail sales and trade activity towards the end of the year leaves room for an upside surprise. Meanwhile the Australian economic outlook is mixed. The Reserve Bank may be comfortable with a neutral monetary policy but leading indicators continued to fall and skilled vacancies grew at a slower pace.

JPY: BoJ Kuroda Says Hurdle High for More Easing

Led by the rally in USD/JPY, all of the Japanese crosses traded higher today. While Japan’s trade balance improved significantly in the month of February, economists were looking for the deficit to narrow more dramatically ahead of the sales tax increase in April. Since 2012, the need for energy imports transformed Japan from a country with a history of trade surplus to one that has been running a deficit for the past 2 years. However for the first time in 5 months the deficit narrowed, bouncing from a record low of -2.79 trillion to -800 billion yen, the smallest deficit in 9 months. Export growth accelerated to 9.8% form 9.5% while import growth slowed to 9% from a record high of 25.1%. Imports could rebound in March but will most likely slow further in coming months as consumers reduce their spending after taxes are increased. A number of Bank of Japan officials spoke this evening including Governor Kuroda who continued to express confidence in Japan’s recovery. He said the recovery is led by domestic demand, described the labor market as being very close to full employment and indicated that Japan is becoming a more service-oriented economy. With a smooth path to 2% inflation, Kuroda believes the hurdle for additional easing by the BoJ is very high. With many investors and economists looking for another round of BoJ easing in the second or third quarter, these comments could prompt an adjustment of expectations because they imply that the central bank has no immediate plans to increase stimulus unless the economy contracts significantly after the consumption tax hike.

Kathy Lien
Managing Director

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