Trading the Dollar Post FOMC

• Trading the Dollar Post FOMC
• NZD Crashes after RBNZ Talks Rate Cuts         
• USD/CAD Breaks 1.20
• AUD Backs Off 80 CEnts
• Short Squeeze Takes EUR/USD Towards 1.12
• GBP: Longest String of Gains Since 2012

Trading the Dollar Post FOMC

The U.S. dollar traded slightly higher after today's FOMC announcement but the gains failed to offset the overall weakness in the greenback.  The dollar still ended the day with major losses versus the euro, Swiss Franc, and British pound.  Its performance versus commodity currencies was less consistent and against the yen, the greenback held near 119.  While the uptick in Treasury yields, slide in equities and intraday bounce in the dollar suggests that the Fed was less dovish the benign reaction to FOMC tells us more. The central bank failed to provide any new clues about the timing of the first rate hike and on balance the statement was more dovish. You are living in a fantasy world if you still think the Fed will raise rates in June. With the FOMC meeting behind us, the focus will turn to next week's non-farm payrolls report. For the dollar to regain momentum, we need to see a major rebound in job growth but between and next Friday's NFP report, we expect the dollar to consolidate within new ranges.  USD/JPY will most likely remain confined between 118 and 120 but for EUR/USD that means, 1.13 to 1.08 and for GBP/USD 1.52 and 1.55 before the U.K. election.  The best way to trade the dollar post FOMC is to trade these ranges before NFPs.

As for the specifics, in the April FOMC statement, the central bank acknowledged that economic growth slowed during the winter months as job growth moderated and spending eased. Business investment also loss momentum and inflation remained well below their long-term objective.  This sanguine assessment of the economy should have driven the dollar lower but the Fed views these changes as temporary.  With household incomes rising strongly and consumer sentiment remaining high a rate hike in 2015 remains firmly on the table. However the slowdown in the first quarter will push liftoff out to September as the Fed needs to see the economy recover from its winter blues before raising rates.  This morning's significantly weaker first quarter GDP report does not make being long dollars any easier.  After growing 2.2% in Q4, the economy expanded by a meager 0.2% in the first quarter. The one major change that the central bank made to today's statement was the decision to drop its calendar guidance in favor of a focus on data. 

NZD Crashes after RBNZ Talks Rate Cuts         

The New Zealand dollar fell hard after the Reserve Bank of New Zealand warned that they could lower interest rates if demand weakens and inflationary pressures continue to fall.  They also described the NZ dollar as unjustifiably and unsustainably high.  Although last night's trade balance report blew out expectations with the surplus jumping to 631M from 83M (more than double the forecast), the central bank is worried that the rise in exports will be unsustainable if the currency remains strong.  Fonterra added to the pain by reducing their payout forecast.  We expect NZD/USD to drop to 0.75 cents on the back of the RBNZ rate decision and for AUD/NZD to hit 1.06. Meanwhile USD/CAD dropped below 1.20 on the back of soaring oil prices and stronger inflation data. Economists were looking for a decline in industrial product prices but prices rose 0.3%.  Raw material prices dropped but 50% less than anticipated. GDP numbers are scheduled for release tomorrow and given the improvement in trade and retail sales, we look forward to a stronger report that could extend the gains in the loonie.

Short Squeeze Takes EUR/USD Towards 1.12

The two best performing currencies today were the euro and Swiss Franc. The euro rose more than 1.25% against the greenback to its highest level in nearly 8 weeks.  USD/CHF dropped over 1.6% to its lowest level since February.  The moves in these currencies were driven entirely by the unwinding of long dollar, short euro and franc positions.  According to last week's CFTC Commitment of Traders Report, speculators still held massive short positions and as the FOMC meeting neared, they unwound their exposures.  We are certain that if the CFTC measured EURUSD short positioning today, it would be significantly less than last Tuesday. With that in mind, 1.12 is an important resistance level in the EUR/USD and we would not be surprised if some traders reloaded their short positions at current levels.  Economic data from the Eurozone was mixed.  Business confidence improved but industrial and economic sentiment deteriorated.  Consumer prices in Germany dropped -0.1% after rising 0.5% the previous month. German retail sales and labor market data is scheduled for release tomorrow along with the Eurozone unemployment rate and CPI estimate. Stronger numbers could drive EUR/USD above 1.12. 

GBP: Longest String of Gains Since 2012

Like all other major currencies, sterling benefitted significantly from broad based dollar weakness.  In fact, the currency rose for the seventh consecutive trading session against the U.S. dollar. GBP/USD has now traded higher for 12 out of the last 13 trading days.  U.K. data was mixed with house prices rising strongly but retail sales growth slowing significantly according to the Confederation of British Industry.  Sterling has been driven by the market appetite for U.S. dollars this week but that will change on the back of next week's heavy data calendar.