Fire Sale in the Dollar

• Fire Sale in the Dollar
• Dollar Outlook - 5 Changes We Expect From The Fed
• Sterling Sinks to 4 Year Lows on Wage Data
• USD/CAD Hits Fresh 5 Year Highs
• NZD Bounces Ahead of Q4 GDP
• AUD: Leading Indicators Rise
• Euro Hits 1.10, SNB Rate Decision Next

Fire Sale in the Dollar

The Federal Reserve dropped the word patient from the FOMC statement and the dollar collapsed - not a reaction that you would normally expect from a move that puts the central bank closer to raising interest rates.  However a lower growth and inflation forecast along with a change in the "dots" that measure individual expectations for rate rises led the market to believe that the Fed may not raise interest rates in June.  Our readers should not be surprised by the dovish undertone of the FOMC statement as each of these changes were outlined in our Fed Preview.  We have long believed that the Fed will opt to tighten in September instead of June and our view has not changed with today's monetary policy announcement. We are still looking for the Fed to raise interest rates in 2015 and according to comments made by Janet Yellen during her press conference they still plan to tighten this year.  She said nothing at the press conference to lead us to believe otherwise and in fact her optimism about the strength of the economy and her expectation that the decline in inflation will be temporary indicates that a June hike is still on the table.  Yellen said that a rate rise in April is unlikely but a hike any meeting after that including June is possible. With 3 months to go before this key summer meeting, the central bank has plenty of time to see how data fares before making their decision, which explains why Yellen said no patience is not the same as impatience.  The Fed is in no rush to raise interest rates but if data starts to improve they won't hesitate to do so and today's change in forward guidance provides them with maximum flexibility to make changes when necessary. 

We believe that there is a fire sale in the U.S. dollar right now and if you don't buy in the next few days or weeks, you may regret it. The main takeaway from today's monetary policy meeting is that U.S. rates are still headed higher this year and nothing today changes our outlook. The Fed may not move as quickly as some dollar bulls had hoped and the dollar is adjusting as a result. However we don't expect the slide to last and 6 months forward we expect the dollar to be trading 3 to 5% above current levels. In our FOMC preview we published the following table illustrating how the dollar index performed 1 month, 3 month and 6 months after the Fed changed its forward guidance and any losses in the first month were short lived.  This is consistent with our view that the dollar will continue to trade higher in the coming months and because of that, we view the decline in the greenback today as an opportunity to buy at lower levels.

Sterling Sinks to 4 Year Lows on Wage Data

Before reversing higher on the back of U.S. dollar weakness, the British pound dropped to its lowest level in 4 years on dovish Bank of England minutes and weaker wage data.  U.K. policymakers expressed their concerns about sterling strength and its impact on inflation.  They feared that the currency could rise further and that would cause low inflation to persist for longer as a result.  While sterling lost significant value versus the U.S. dollar this month, it traded sharply higher versus the euro and was at 7-year highs during the last Bank of England meeting.  For the U.K., the level of EUR/GBP is far more important than the level of GBP/USD.  The decision to keep interest rates unchanged was unanimous but 2 members continued to see the decision to leave policy steady as "finely balanced" with the one member calling for looser policy in Feb moving to the consensus view.  The central bank said labor costs are growing faster than they forecast but according to the latest employment report, it was still not as fast as economists anticipated. The forecast today was for average weekly earnings growth to accelerate to 2.2% from 2.1% but instead it slowed to 1.8% in the month of January.  Jobless claims fell -31k, which was right in line with expectations but the unemployment rate held steady at 5.7% and did not improve like economists expected.  Chancellor George Osborne also laid out the government's 2015 Budget today. He expects the economy to grow faster despite lower global growth and trade forecasts. He also predicted a surplus by 2018-2019. Tax breaks were announced for corporations and individuals including the oil industry.  Although the dovish BoE minutes could keep sterling under pressure for the near term, we still believe that the central bank is poised to raise rates this year and as a result, the divergence in monetary policy should limit gains in EUR/GBP.   

USD/CAD: Double Top 1.28

Falling oil prices drove USD/CAD to 5-year highs but the currency pair dropped nearly 2% today as the falling dollar turned oil prices and USD/CAD around.  The price of crude was trading at 6 year lows before the inventory data and moved even lower when the report revealed that inventories hit record highs but at the end of the day all that really mattered was the U.S. dollar. 1.28 has proven to be a formidable barrier of resistance for USD/CAD but whether this becomes a short or long term top for the pair will depend on how oil trades.  If it reverts lower once again like we expect, USD/CAD could retest these levels. Today's sharp decline in wholesale sales points to the potential of weakness in the broader retail sales report scheduled for release at the end of the week.  The market clearly thinks that the data matters because the 5 year high was hit after wholesale sales.The Australian and New Zealand dollars also traded higher against the greenback.  New Zealand's current account deficit narrowed less than expected but after yesterday's sharp slide, investors are optimistic going into this afternoon's Q4 GDP report.  Economists are looking for annualized GDP growth to accelerate to 3.4% from 3.2%.  There's no data scheduled for release from Australia but last night, we learned that leading indicators rose 0.3% in February up from 0.1% in January according to Westpac.

Euro Hits 1.10, SNB Rate Decision Next

EUR/USD surged to 1.1040 today on the back of the FOMC rate decision.  Today's move in the euro was driven entirely by the market's appetite for U.S. dollars and we expect this to remain the case for the rest of the week as the currency pair barely budged off this morning's weaker trade data.  The Eurozone trade balance shrank to 7.9B from 24.3B in the month of January, which was close to 50% less than economists anticipated.  Exports were unchanged but lower oil prices drove imports down 6%. The Swiss Franc is in focus tomorrow with the Swiss National Bank's monetary policy announcement.  EUR/CHF recovered strongly from the lows set after the SNB abandoned its 1.20 peg.  Some market participants believe that the central bank now maintains an informal 1.05-1.10 band and if that is true, they will be happy to see the currency pair trading above this level when they make their announcement tomorrow.  With the volatility in the Swiss Franc easing and EUR/CHF finding a comfortable range above 1.05, we expect monetary policy to remain unchanged. However the central bank could reiterate its dovish bias, which in of itself could be enough to drive EUR/CHF higher.