Dudley's Dovish Declaration Develops into a Deluge of Dollar Disposal

It’s been a disastrous day for the world’s reserve currency: the US Dollar Index is trading down by over 1.5% to a new 3-month low near 97.00 and the greenback is falling against every one of her major rivals. As ZeroHedge gleafully noted on twitter, the US dollar index is seeing its biggest drop since Q1 2009, when the Federal Reserve first introduced quantitative easing.

The proximate cause for today’s collapse appears to be this morning’s comment from the influential head of the New York Federal Reserve, William Dudley. In an interview with Market News International, Dudley stated, “One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting…things have happened in financial markets and in the flow of economic data that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward."

Along with Fed Chair Yellen and Vice Chair Fischer, Dudley speaks for the powerful “core” of the Federal reserve and as a result, his comments tend to carry more weight than those of other regional Fed presidents. While he later returned to typical vauge FedSpeak, noting that it was "a little soon to draw any firm conclusions,” the explicit mention of the recent financial market turmoil reminded traders that lately, the markets have been the proverbial “tail” wagging the Fed policy “dog,” not the other way around. As a result, Feds Funds futures traders have now pushed back the implied odds to a Fed rate hike at all this year to just 38%(!) as of writing.

Technical view: NZD/USD

While the damage to the buck has been broad-based, potentially the biggest moves are against the commodity dollars with the currencies of Canada, Australia, and New Zealand all trading about 2% higher against the US dollar.

We touched on the technical outlook for NZD/USD last week, but wanted to revist that pair after today’s massive 2.5% rally. Last Thursday, we noted that “NZD/USD’s near-term movement will likely hinge on global risk sentiment: if major risk assets (led by oil) are able to extend the current rally, the higher-yielding NZD/USD will likely follow suit.” With oil trading higher by nearly 8% today, the rally in all the commodity dollars is hardly surprising.

After today’s explosion, kiwi is testing its 200-day moving average against the US dollar at .6720; this will be the next major hurdle for bulls. In terms of fundamental catalysts for the pair, Friday’s Non-Farm Payroll report is the proverbial elephant in the room (stay tuned for our full NFP preview report tomorrow afternoon). If NFP comes in below 200k (especially if see minimal wage growth as well), it would validate traders’ concerns about the US economy and Fed policy, potentially pushing NZD/USD back toward the 6-month high near .6900 in process. Of course, a strong NFP report could alleviate some of the market’s concerns about the dollar, likely leading to a near-termd dip back toward .6600 or .6500 in NZD/USD.