Why the greenback denies a trip to the north?

Investors do not seem to have any patience in waiting for Dollar to rally in near term. Speculating accounts recently cut their bullish bets on USD aggressively, as seen from the data of Commodity Futures Trading Commission (CFTC). Dollar only outperformed Swedish Krona and CAD since the beginning of 2014, while the top 3 outperformers are NZD, AUD and JPY.

From the end of 2013 until the beginning of this year, investors carried a strong confidence that Dollar would be supported by a stronger U.S. economy and reductions in the Fed’s bond purchases. Until now, many people acknowledged that the earlier weaker data belonged to the effects of bad weather. Not only that Dollar’s performances diverges from earlier consensus, but a flattening U.S. Treasury yield curve suggested that the Fed’s policy will be accommodative for some time.

US. Treasuries Yield Curve

It is also unfair to conclude this year’s weakening Dollar was due to pricing out tightening fears. Dollar index has been in a firm downtrend since the middle of July last year. A less accommodative Fed’s policy would not lead the Greenback to outperform significantly against the rest. By using the “reality” rather than “consensus” to judge, we noticed that the pace of Fed’s balance sheet has been carrying a similar momentum to Bank of Japan’s (BoJ) money base acceleration, while the European Central Bank’s (ECB) balance sheet has been shrinking substantially.

Fed balance sheet (yellow), BOJ balance sheet (purple), ECB’s balance sheet (white)

Investors are focusing on the March Federal Open Market Committee (FOMC) Minutes tonight, as it might tell the direction of the Fed’s incoming policies after Janet Yellen provided a signal that the duration between the end of tapering and the beginning of a rate hike would be in around six months. Fewer interests generated on the pace of tapering nowadays, as the timing of a rate hike would become one of the key engines to drive the Greenback. However, as mentioned above, the Fed’s balance sheet is still expanding aggressively comparing to most of other central banks’.

Traders expected a monetary policy divergence between the Fed and its Euro Area and Japanese counterparts to support the Dollar. But the scenario does not seem like it at the moment or in the near future. Further expansions of ECB’s and BoJ’s balance sheets are merely expectations by investors so far. The possibility of this happening is relatively low in the second quarter of this year, when ECB needs some time to design the Quantitative Easing (QE) program when needed, and when BoJ needs to evaluate the consequences of sales tax hike.