In Yellen Aftermath Markets Dump the Dollar

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Market Drivers February 25, 2015

Dollar weakens as rate hike looks less likely
Aussie pops on better Chinese data
Nikkei -0.10% Europe -0.22%
Oil $49/bbl
Gold $1207/oz.

Europe and Asia:
CNY HSBC Flash Manufacturing 50.1 vs. 49.6
GBP UK BBA Mortgages 36.4K vs. 36.2K

North America:
USD New Homes Sales 10:00

Yellen testimony 10:00

The greenback was decidedly lower in Asian and early European trade today as the impact of Fed Chair Yellen’s testimony in front of Congress began to sink into the market. In yesterday’s testimony in front of the Senate Ms. Yellen offered no concrete timetable for a rate hike and seemed to back away from the idea of forward guidance.

The Fed confirmed that the US economy is improving, but also noted the lack of inflation in the system as well as slack in global growth demand. In short the message from Ms. Yellen was – “We are close to normalization, but not quite yet.” The news pushed the buck lower especially against the yen and in today’s trade the greenback continued to weaken against the the other major trading partners with Aussie and sterling especially well bid.

Both Aussie and cable benefited from positive economic data released today. The Aussie ran all the way to 7900 figure on the back of better HSBC Flash PMI readings out of China. The PMI popped back above the 50 boom/bust line printing at 50.1 versus 49.6 eyed. This was the first expansionary reading in four months suggesting that the manufacturing sector may have stabilized.

Chinese growth has slowed to a 14 year low as the country tries to pivot from a manufacturing giant to a more consumption based society, but today’s news was a welcome note of relief for investors who were becoming concerned that the manufacturing sector could slip into a recession. The Aussie was the biggest beneficiary of the news as pick up in Chinese manufacturing indicates that demand for Australia’s raw materials may remain steady.

In UK the pop in BBA mortgage approvals shows that the housing market is starting to percolate again although todays 36.4K print is well off the 45K-50K monthly run rate posted in 2014. Still it may be an indication that low rates and rising wages are finally starting to fuel demand and cable responded accordingly rising steadily through the night as it took out the key 1.5500 level before profit taking kicked in.

Cable has shown relative strength since the start of the week and may push towards the 1.5600 level as the day progresses. Today brings the second day of Ms. Yellen’s testimony and while she is unlikely to add anything new, if she reiterates her caution on the timetable for normalization, the dollar selloff could accelerate as the US session proceeds with EUR/USD possibly testing 1.1400 while sterling eyes the 1.5600 level.

Boris Schlossberg
Managing Director

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