USD bulls tamed by a familiar, cautious tone by Fed chair Yellen

This week has not been one to savour for USD bulls, with the FOMC rate hike accompanied by a statement which failed to generate the fresh wave of hawkish sentiment markets had positioned for. We saw some hesitancy ahead of the Fed announcement Wednesday evening, with Fed chair Yellen’s familiar cautiousness reining in UST yields to a modest degree. The subsequent pull back has also been relatively modest with the 2yr shedding 5bps on the week as a whole; both 5yr and 10yr off the highs by some 10bps.

Fresh US data will therefore be required to drive fresh direction, and with the Fed reiterating their longer term rate at 3.0%, sluggish progress in the belly of the Treasury (yield) curve is perhaps unsurprising. No major releases out of the US until the end of the week when the Friday schedule offers up March services and manufacturing PMIs. Among the USD pairings, USD/JPY remains the most vulnerable given the heavy Fed based positioning, even though the BoJ have no plans to alter their accommodative policy stance. Over the near term however, end March is Japanese year end, and this could see JPY repatriation flow tipping the balance to see the 112.50-111.50 area tested at the very least.

For EUR/USD, upside pressure has been more a case of easing political tensions as the Dutch elections voted against the far right movement, much to the relief of the rest of Europe, with this likely to ease concerns for the relevant parties in France. Perhaps of greater influence has been the change in sentiment at the ECB, which has since been underpinned by comments from Novotny alluding to movement in interest rates (still in negative territory). The lead spot rate has now put in an early test on 1.0800, but as we neared this level early Friday, the selling interest intensified, as many anticipated. We still see some looking to an eventual return to the lows, but the daily charts suggest otherwise.

This has played a large part in the EUR/GBP move higher, but Brexit uncertainty is here to stay for now, and potentially for the next 2 years! Against this, a hawkish shift at the BoE where the majority of the MPC see a need for a rate hike sooner than previously believed, helped solidify the resistance seen from 0.8800-50,. On the downside, demand ahead of 0.8650 continues to stubbornly hold. This is in part due to the resistance in Cable from 1.2400, having stopped a tick shy of the figure early Friday. Economic data of late – although coming off better levels – holds its ground to allay fears of collapse in the UK, so it will not surprise us to see some of this GBP undervaluation curtailed – currently around 9% based on the WPI. Key inflation data out on Wednesday, followed up by retail sales on Thursday – both for Feb.

Also on Wednesday is the next RBNZ rate decision, and even though no change is expected in the current base rate (1.75%), traders will be looking for any (further) verbiage on the exchange rate. At their last meeting in 9/10 Feb, NZD was trading on a 0.7300 handle, but more significantly was an AUD/NZD rate still trading comfortably below 1.0500. The spot rate has since tested to a little under 0.6900, while the cross has now managed to tip the 1.1000 mark. We also have the latest Global Dairy Trade index from the Fonterra auctions ahead of this, with national trade data on Friday. In Australia, the RBA minutes usually offer little fresh insight on policy sentiment.

Once again, we saw USD/CAD resisting a move on 1.3600 on the topside, with the modest fallout in Oil prices faded out within established ranges - for now. This may have a deeper impact if WTI cannot reclaim the USD50.00 mark, but from the domestic data perspective, the numbers have shown considerable improvement, notably Q4 GDP and the recent payrolls shift (gain of 100k+ into full time employment). The follow on effect of US growth also contains any excessive weakness in the CAD, leading some to believe 1.3000-1.3500 is set limit the range near term. Canadian inflation data at the end of next week.