USD battered as Fed sends mixed messages 30Mar16


USD battered as Fed sends mixed messages

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • ADP employment beats forecasts
  • Fed officials send mixed messages; Yellen’s dovish Tuesday speech hits USD
  • Month-end flows may also batter USD
  • USD index looking soft
  • Dovish Yellen, neutral BoC, stable oil and improving domestic data create CAD upside

Greenback knocked by dovish Fed chief. Photo: iStock

By Michael O’Neill

The US dollar isn’t having a good day. In fact it’s having a lousy day as the fall-out from Federal Reserve chief Janet Yelln’s dovish speech on Tuesday continues. This morning’s ADP employment data beat the forecast, but only caused a slight pause in the USD selling, partly because of reports that month-end portfolio rebalancing may result in sizeable USD sales.

US dollar circling the drain

Yellen pulled the plug on the US dollar and it is circling the drain. In a speech to the Economic Club of New York on Tuesday, Yellen said she anticipates “that the overall fallout for the US economy from global market developments since the start of the year will most likely be limited.”

Then she went on to say why that won’t be the case. Yellen pointed out that there have been signs that inflation expectations may have drifted down, noting that “the measure of longer-run inflation expectations reported in the University of Michigan Survey of Consumers has drifted down somewhat over the past few years and now stands at the lower end of the narrow range in which it has fluctuated since the late 1990s.

She said she was concerned with the pace of global growth, particularly with how smooth China’s attempt to transition from investment to consumption will be.

Yellen was also wary of falling oil prices. “In the event oil prices were to fall again" she said, "either development could have adverse spillover effects to the rest of the global economy. If such downside risks to the outlook were to materialise, they would likely slow US economic activity, at least to some extent, both directly and through financial market channels as investors respond by demanding higher returns to hold risky assets, causing financial conditions to tighten”

US dollar bulls read or heard the speech and quickly bailed, assuming that the prospects for two or more rate hikes in 2016 had evaporated.

The Fed chief Janet Yellen said there were signs inflation expectations have

drifted lower. Photo: US Federal Reserve

Remember the dress colour furor?

In February 2015, a couple of women from the UK sought input from websites as to the colour of a dress and it sparked a world-wide debate. Was it white and gold, blue and white, or blue and black?

Last week, St Louis Fed president James Bullard said in a Bloomberg interview, “You get another strong jobs report, it looks like labour markets are improving, you could probably make a case for moving in April.”

His colleague, Atlanta Fed president Dennis Lockhart (non-voter) reportedly said the Federal Reserve could hike rates as early as next month. Richmond Fed president Jeffrey Lacker said he was confident that inflation would accelerate in coming years and hit the Fed’s target.

These hawkish-leaning statements were thought to be a message to markets that the March Federal Open Market Committee statement was not as doveish as initially believed. The US dollar started to rise. On Tuesday, Janet Yellen, put paid to that question.

Today, Chicago Fed president Charles Evans called for two rate hikes and wasn’t concerned about a China hard landing. He suggested that the Fed could hike in June on the basis of continued labour market gains.

All of the above is proof that Yellen and her fellow FOMC members are looking at the dress, and no one knows what colour it is.

USD index is looking soft

The US dollar weakness sparked by Yellen’s speech on Tuesday may continue if the USD index can be used as a guide. The USDX is in a downtrend while trading below 96.10, looking to extend losses through minor support in the 94.30- 94.60 area to 93.80. A recovery above 96.10 would negate the downside pressure.

USDX daily with Fibonacci levels shown

Source: Saxo Bank

Month-end flows could KO dollar

The dovish Yellen speech was just one major negative for the US dollar. The other, fleeting as it will be, is the prospect of sizeable month-end USD sales for portfolio rebalancing needs. The US equity market performance versus the major global indices reportedly points to USD selling. If so, key resistance levels like 1.1380 in EURUSD, 1.4580 in GBPUSD may get tested, while USDJPY 111.00 could be seen.

Loonie likes Yellen

Spring has sprung and it’s coming up roses for the Canadian dollar. The federal government announced a fairly hefty infrastructure spending programme to help boost the economy, allowing the Bank of Canada to sit on the sidelines and leave interest rates unchanged. On Thursday, real GDP data is forecast to rise 0.2%, supporting the view that the domestic economy is rebounding. Oil prices have remained firm and in an uptrend while trading above the $37.90-$38.25/barrel area. A dovish Yellen, a neutral Bank of Canada, stable oil prices and steadily improving domestic data suggest additional upside for the CAD.

USDCAD technical outlook

The intraday downtrend remains intact while trading below 1.3060, looking for a break below 1.2980 to test 1.2920. The short-term downtrend from the end of January remains intact while trading below 1.3330, and it is looking for a test of support at 1.2924, representing the 50% retracement level of the November 2014-January 2016 range. If that goes, losses will extend to the 1.2810-30 area and point toward 1.2500

USDCAD daily with Fibonacci levels

Source: Saxo Bank

— Edited by John Acher

Michael O’Neill an FX consultant at IFXA Ltd.

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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