Complete Dollar Domination

It is complete USD domination on the currency markets with the USD continuing to punish the overwhelming majority of its trading partners. The NFP announcing that the United States added another 295,000 jobs to its economy last month just further highlighted the complete divergence in economic sentiment between the United States and most other economies right now. As a result, traders are rushing to the Greenback and pushing the Dollar higher. As you would expect, the NFP result once again reaffirmed expectations that the Federal Reserve will have to raise US interest rates this year, which is another reason behind the additional surge in USD demand.

It’s been mentioned before that the complete divergence in economic sentiment and monetary policy between the United States and everywhere else has already become eye-catching, and it seems that it will continue to stretch even further. The question is being asked regarding what the NFP report means to the FOMC policymakers and to be honest, I don’t think it will affect when the US central bank will pull the trigger and raise interest rates. June is not out of the question, however I estimated as early as last summer that it would be this September and I am sticking to my guns on this. It should be noted that emerging market currencies are amongst the ones who are being hit the hardest by the USD strength, and the Federal Reserve will be monitoring any potential sudden exit of capital outflows. In my opinion, I do feel that the Federal Reserve will begin to monitor the risk of a sudden exit of capital outflow from emerging markets, as much as it already monitors inflation expectations.

As a result of the extra USD demand, the Eurodollar is sinking, with the latest 11-year low recorded at 1.0734. At the rate the pair is currently falling, the Euro could hit parity against the USD within the next couple of months. After extending below the critical 1.10 support level late last week, the pair really is in freefall and it is uncertain where it will be caught. Of course, it doesn’t help matters that Greece is appearing in the headlines for the wrong reasons after Jeroen Dijsselbloem, head of the Eurozone Finance Ministers, basically told Greece to stop wasting everyone’s time. It should also be noted that the ECB have now officially implemented QE, which basically means the central bank has now entered a new era of monetary easing – and another reason to expect continued currency weakness.

Each time the Euro weakens, the CHF magically appears to weaken in sync with it. This suggests to me that the Swiss National Bank (SNB) has set a new minimum exchange rate, or another large financial institution is hedging on it. The USDCHF has now bounced as high as 0.9961 and is probably going to reach parity at some point over the next couple of days, which is far earlier than I had previously forecasted it to do so. On the subject of minimum exchange rates, the EURDKK has jumped to 7.4521 this morning and with the Euro taking a hiding against its other trading partners the only reason for the bullish momentum must be the Danish central bank intervening in the currency markets to defend the EURDKK peg.

The gold market is look very appealing to bearish traders after the NFP reaffirmed US interest rate expectations. The yellow metal has fallen to a three-month low at $1142 as a result of the USD strength and with interest rate optimism underpinning the longer-term bearish forecasts for metals, traders are probably looking at any potential bounces higher as an opportunity to sell on rallies.

Just to sum up and as far as I am concerned, there are three different types of central banks right now, which are as follows:

1) The hawkish who are on the verge of raising interest rates at some point soon (Federal Reserve)

2) The neutral who very much have a laissez-faire attitude towards interest rates right now (BoE)

3) The dovish who have eased monetary policy this year in an attempt to devalue their currency (around 20 and counting)

As you can see, the Federal Reserve is standing alone and trader’s money is clearly on the table of the USD. There is an old saying in the currency markets that “the trend is your friend” and the trend is clearly with the USD. We haven’t even approached the time where we can expect an imminent US interest rate rise, meaning there is still fuel in the fire for the USD momentum to escalate even further.