Markets await Fed Chair Yellen's semi-annual testimony

Forex News and Events

FX markets will be focused on Fed Chair Yellen’s semiannual testimony before the Congressional Committees. The comments are expected to carry significantly more weight than the FOMC meeting minutes. We continue to expect the first rate cut at the June meeting which should be signaled by the removal of the word “patient” from its policy directives. In recent weeks Fed statements have become highly ambiguous with no real sense of when the timing of the first hike is likely to come. Yellen might want to keep her policy options open and not pre-empt the official notification. Yet strong economic data suggest this announcement is coming. The latest Job Openings survey also showed the highest number of job vacancies in this expansion cycle, indicating that robust job growth will continue. It’s only a matter of time when the tightening of the labor markets will put pressure on labor cost and prices. This should reverse current decline in inflation cause primarily by the rapid fall in oil prices, as wages play a much larger part in applying pressure. We see the biggest barrier to higher interest rates to be the stronger USD.

Don’t get excited over Commodity Currency Rally

Rebound in commodity price has many pricing in a strong recovery in AUD, NZD, CAD and NOK (commodity currencies). However, its unlikely commodity prices have more upside. With inventories rising sharply, pace of demand will have to increase significantly to clear the supply overhang before prices can resume their bullish trend. BoC members have sounded increasingly bearish given the downward trend of inflation, sending CAD lower. With CPI expected to ease further and members becoming more dovish we are bearish on CAD. Today BoC Governor Poloz will speak on “Lessons New and Old: Reinventing Central Banking.” We are bullish USDCAD and expect break of range high at 1.2698 to confirm bullish extension to 1.3065. The recent weakness is seen as a medium-term corrective phase. Key supports stand at 1.2314 (22/01/2015 low) and 1.2047 (intraday low).

Time to sell deficit running EM nations

With US longer term yields on the rise, we again need to focus on current account deficit EM nations which are sensitive to changes. Despite the soft incoming US data and slightly dovish FOMC minutes we still expected rate hike to begin in June. US yields will continue to steepen but at a slow pace especially as the ECB begins its bond buying program. None-the-less increase in USD funding cost will occur. In the last few years developing nations borrow in USD has increased significantly making then extremely susceptible to sudden adjustments. Prime culprits include MXN, BRL Turkey, and Russia.