Dollar - Patient No More?

Market Drivers February 24, 2015
Dollar continues to strengthen ahead of Yellen testimony
Aussie and kiwi weakest on the night as inflation expectation drop
Nikkei 0.74% Europe 0.02%
Oil $49/bbl
Gold $1195/oz.


Europe and Asia:
NZD Inflation Expectations 1.8% vs. 2.1%
EUR CPI -0.6% vs. -0.6%

North America:
USD Consumer Confidence 10:00
Yellen testimony 10:00

The dollar continued to power through gaining against it major trading partners ahead of the key testimony by Fed Chair Janet Yellen in front of US congress later today. Ms. Janet is set to brief the Senate and the House in a two day semi -annual Humphrey Hawkins testimony with markets hanging on her every word as they look for any clue as to the timetable for normalization of rates.

In her prior comments Ms. Yellen established an informal metric that the word "patient" would mean at least two meetings before any action is taken, Therefore the first and foremost point of interest for the market will be whether the Fed Chair drops that language from her prepared remarks. Any absence of the word patient could send USD/JPY into a vertical spike driving it through the 120.00 level as markets will instantly assume that a rate hike is coming in June.

However, Humphrey Hawkins meetings can be notoriously volatile affairs especially if Ms. Yellen qualifies her remarks in the Q & A session that follows and gives herself some flexibility on the timeline. It appears that the Fed is ready to normalize policy, but concerns about low inflation and weak global economic demand are causing some FOMC members to hold off on pulling the trigger on rates.

There are some encouraging signs that deflationary pressures have eased as average hourly earnings have finally started to beat consensus estimates while Wal-Mart which is a proxy for many entry level jobs has finally decided to raise the starting salaries of their workers. All of this suggests that the US economy is on the right track but the Fed may choose to err on the side of caution and not signal any rate hike until September.

For the time being markets are likely to tread water as traders square up ahead of the ,marquee event of the week. Given Ms. Yellen's historical dovishness its hard to imagine her becoming unambiguously bullish on rates. Therefore if she surprises the market by providing a clear and exact timeline for normalization the dollar rally could be massive as not only the currency markets, but the equity and the fixed markets all react to the new monetary regime.

If however, Ms. Yellen remains non-committal the dollar could see weakness across the board but especially against the pound which is showing relative strength today as traders anticipate that the BOE will follow the Fed on path towards normalization.