Did Janet Yellen Kill the Dollar Rally?

• Did Janet Yellen Kill the Dollar Rally?
• Euro: Greece Submits and Receives Approval for Reform Proposals
• USD/CAD Crashes on Bank of Canada Comments
• AUD: Waiting for Chinese Data
• NZD: Hit by Lower Inflation Expectations
• Sterling Supported by BoE Comments

Did Janet Yellen Kill the Dollar Rally?

The Federal Reserve is in no rush to raise interest rates according to Janet Yellen's semi-annual testimony on the economy and monetary policy. While the central bank governor expressed optimism about the economic outlook and inflation, she provided no signal on when interest rates would rise.  As a result, forex traders were sorely disappointed but equity and Treasury traders celebrated by sending stocks to record levels and Treasury prices higher.  Going into today's speech, dollars bulls hoped that Yellen would outline a clear path and time frame for tightening but the head of the Federal Reserve opted for flexibility over clarity.  According to Yellen, rates could rise at any time but that may not be in next couple of months.  When the Fed is ready to raise interest rates, they will change their forward guidance, preparing the market for the imminent move.  By keeping the word "patient" in the monetary policy statement, the Fed is telling us that liftoff will not happen for at two more meetings.  So when the central bank is ready to move on rates, their first step will be to drop the word "patient" from the FOMC statement.  The decline in the dollar against the euro, Japanese Yen and other major currencies today indicates that dollar bulls hoped for more but at the end of the day, we still believe that buying dollars is the right trade because a 2015 rate hike remains on the table. 

GDP growth is strong enough to gradually lower the jobless rate according to Yellen and lower oil prices are a significant net plus for the U.S. economy. While China could slow more and the euro area faces risks, the risks are not just on the downside. Inflation could fall further in the near term but should gradually rise back to 2%. The Fed would like to see stronger wage growth but continued strength on jobs should help to lift wages.  The central bank doesn't want to raise interest rates too quickly because they fear that a premature increase would undermine the recovery and hamper job healing.  This confirms our view that a June rate hike is unrealistic but in the summer, the Fed could drop the word patient from their statement, paving the way for higher rates in September.  We firmly believe that the Fed will change forward guidance at a meeting with a press conference.  There are only four of these per year and March is too soon for the change, making June the best option.  Market expectations had gotten ahead of themselves in recent weeks with many investors hoping for a rate hike in June so the decline in the dollar today and the drop in U.S. yields reflects a much-needed adjustment.  With this in mind we believe that traders should have the opportunity to reestablish USD/JPY long positions near 118.25.

Euro: Greece Submits and Receives Approval for Reform Proposals

While Janet Yellen's less dovish comments on U.S. monetary policy was the primary catalyst for the rebound in the EUR/USD today, the currency pair also benefitted from the European Commission's acceptance of Greek reform proposals.  After missing their deadline on Monday, the Greek government sent a detailed list of reforms that they plan to enact by June.  Finding the list sufficiently comprehensive, the Eurogroup and the ECB approved the reform plan, locking in a 4 month bailout extension for Greece.  This extension removes the immediate risk of a Grexit but does not take it off the table.  The muted rally in the euro tells us that investors realize that talk of Grexit could return if the country fails to meet their goals.  IMF head Christine Lagarde and ECB President Draghi were quick to expresd reservations with Lagarde calling the list of new measures "not that specific."  It will be a long road ahead because Greece won't receive any new bailout money until their government passes the reform measures and further negotiations are needed to structure a longer-term rescue deal.  In the meantime however, investors are still relieved that Greece did not delay the submission once again and the Eurogroup did not reject the reform plans.  There are no major Eurozone economic reports scheduled for release tomorrow but ECB President Draghi will be testifying before the European Parliament - so watch for any comments on the economy or monetary policy. 

USD/CAD Crashes on Bank of Canada Comments

The Canadian dollar shot higher against the greenback after Bank of Canada Governor Poloz crushed expectations for another rate cut in March.  While the central bank firmly maintains a dovish bias and expressed concerns that lower oil prices hurts the Canadian economy, posing a risk to financial market stability, Poloz also felt that the negative impact is "immediate" whereas the positive forces will flow in gradual. The January rate cut was insurance against a deeper downturn and buys the government time to see how the economy responds.  In no way shape or form is the Bank of Canada happy with the way the economy is performing. In fact, Poloz described the global economy as serially disappointing and said exports have vastly underperformed. However they are still not clear how much strain the oil shock will have on Canada's economy and therefore decided to ease earlier this year so they can have time to assess the damage.  The BoC will most likely have to lower rates again this year but with the Fed not expected to raise rates until the fall, giving the U.S. economy more leeway, they can afford to wait. The Australian dollar also traded higher on U.S. dollar weakness. Chinese manufacturing data is scheduled for release tomorrow and a soft report could sap the gains.

Sterling Supported by BoE Comments

The British pound ended the day unchanged against the euro and U.S. dollar despite hawkish comments from Bank of England officials. While BoE Governor Carney said inflation could drop below zero, he also added that U.K. inflation is low due to temporary factors. In other words, the low level of CPI should not stop the central bank from raising interest rates because prices should rise in the coming months. MPC members Forbes and Weales were more direct with Forbes saying wage growth is picking up and there is limited slack in the economy. She said rates will have to rise at some point and a gradual increase should support the economy. Weale agreed that recent data confirms that pay pressures are building and monetary policy should be based on expected not current inflation. As a result, he felt that rates could rise sooner than the markets expected.  Clearly, the majority of U.K. policymakers are leaning towards higher rates and this should promote further gains in the British pound.