Did the Fed Kill the Long Dollar Trade? NO.

• Did the Fed Kill the Long Dollar Trade? NO.
• GBP: A Promising Outlook for Sterling
• NZD Drops to Fresh 4.5 Year Lows Ahead of GDP
• AUD Hit Hard by Data and Iron Ore
• CAD: Sharp Rise in Wholesale Sales
• EUR: Greece and SNB Outlook

Did the Fed Kill the Long Dollar Trade? NO.

Taking a look at the price action of the U.S. dollar after the FOMC rate decision, there's no question that the Fed disappointed FX traders. Expectations were high going into the monetary policy announcement and unfortunately for dollar bulls hoping for a sharp upside breakout, Janet Yellen failed to deliver.  Investors were hoping for a clear road map for liftoff but she did not even mention that the chance of a September rate hike has strengthened.  In response traders took the dollar lower against all of the major currencies. While the market was disappointed by the Fed, in no way shape or form do we believe that the long dollar trade is dead. In fact our conviction about the dollar rising was strengthened by Yellen's comments. From the FOMC statement and forecast we know that the majority of policymakers expect rates to rise this year with a larger number looking for two quarter point rate hikes in 2015. While Yellen said no decision has been made on the timing for liftoff, she admitted that there is enough data to justify a rate increase. More importantly, she went out of her way to downplay the importance of the first hike.  She describes that the focus on the first 25bp move as overstated because the Fed will raise rates gradually and policy will remain accommodative.  Instead Yellen said the focus should be on the entire rate path, which is not as aggressive.  However, the bottom line is that U.S. rates are rising this year and if the labor market continues to improve and inflation ticks higher we could even see two 25bp rate hikes.  In an environment where the RBA, RBNZ and ECB are either easing or talking about doing so, the dollar will remain attractive.  Therefore we have used the latest pullback as an opportunity to reload some of our long dollar positions because the long dollar trade is not dead. Here are our main takeaways from today's main event - 

Main Takeaways from FOMC Statement & Forecasts: 

1. Dot plots imply two rate hikes in 2015
2. 15 out of 17 FOMC members see first hike in 2015
3. Lowers 2015 GDP Forecast Significantly, Raises 2016 & 2017 Forecasts
4. Raises 2015 Unemployment Forecast
5. Keeps 2015 Inflation Forecast Unchanged, Raises 2016 Forecast
6. Fourth meeting in a row with unanimous decision
7. Shortest FOMC Statement in Nearly 3 Years

 Main Takeaways from Yellen:
 

1. No Decision Made Yet on Liftoff Timing but Could See Data that Justify Rate Increase
2. Optimistic on the Job Gains and Inflation but Wants to See More Decisive Evidence in Wage Growth & Jobs
3. Downplays Importance of Rate Hike - says it is overstated, policy will remain accommodative after liftoff, rate hikes will be gradual and focus should be on path
4. Waiting Too Long to Raise Rates Risks Overshooting Inflation
5. Describes Dollar as Stabilized but Says Rise in Past Year Has Been Significant & Had Negative Effect on Exports

GBP: A Promising Outlook for Sterling

It was another good day for the British pound, which extended higher against all of the major currencies.  Eight days have now past without a pullback for sterling versus the dollar, the same length of time as the bull run in May.  This is also the longest stretch of gains for GBP/USD since April 2012.  While the currency pair's move screams of exhaustion, today's rally was supported by sound fundamentals. Previously we had seen mostly mixed U.K. data but between the sharp rise in average weekly earnings and the Bank of England's admission that wages may be rising at a faster pace than they anticipated, policymakers are warming to the idea of tightening. They also believe that inflation could accelerate "notably" later this year. Two members of the monetary policy committee (Weale and McCafferty) said their decision to keep rates unchanged was finely balanced. While we continue to believe that the first rate hike from the BoE will be in 2016, today's report widens the policy divergence between the U.K. and countries such as Australia, New Zealand and even the Eurozone.  Jobless claims dropped less than expected and the claimant count rate held steady but these numbers were easily overshadowed by the rise in wages.  Retail sales are scheduled for release tomorrow and economists are looking for a decline.  If they are right, it would be the perfect catalyst for a reversal in GBP/USD. However given the jump in earnings and rise in the BRC retail sales report, the odds favor an upside surprise that could extend the rally in sterling. 

NZD Drops to Fresh 4.5 Year Lows Ahead of GDP

The New Zealand and Australian dollars were hit hard today with NZD falling to its weakest level in 4.5 years.  In the past month the currency pair has broken through 5 big figures or lost 500 pips. A large part of the move was driven by weaker data and later the RBNZ's decision to cut interest rates. Tonight first quarter GDP numbers are scheduled for release and a downside surprise could drive the currency pair down to 68 cents. However based on the sharp rise in retail sales and improvement in trade activity, there's a risk of an upside surprise that could trigger a turnaround in the currency but we will view it as an opportunity to sell NZD at a higher level.  The selloff in the Australian dollar was driven by a surprise decline in the Westpac Leading Index and iron prices. The price of Australia's most important commodity dropped to its lowest level in a month.  The Canadian dollar also traded higher as stronger wholesale sales kept the currency supported.

EUR: Greece and SNB Outlook
 
With no Eurozone economic reports released today, euro traded purely on the market's appetite for U.S. dollars.  Another day has passed without any progress on the Greek debt negotiations. Creditors are demanding pension cuts but Greece refuses to budge. German officials are warning Greece and the markets that they are preparing to let Greece default without a deal and they won't tolerate a rushed eleventh hour agreement.  Given the stakes, we fully expect a scrambled attempt to cobble together some type of extension or deal by the end of the month.  Between now and then, daily headlines should cap gains in the euro. Meanwhile, the Swiss National Bank has a monetary policy announcement tomorrow. No changes are expected but the recent strength of the Swiss Franc could drive the central bank to harden forward guidance to ensure that the market realizes rates could be brought deeper into negative territory if the economy weakens further. Since the last monetary policy meeting in March we have seen inflation fall further with annualized CPI dropping to -1.2% from -0.9%. Export growth also remained weak and Q1 GDP turned negative. There have been good news - retail sales rebounded in April, the trade surplus increased and the unemployment rate dropped from 3.4% to 3.2% but the economy is still struggling after the SNB abandoned its EUR/CHF peg.