The Dollar was little changed this past week – which is animpressive turn of events for the currency considering the previous bouts of painful selling. After the FOMC cut its 2016 rate forecasts and Fed Chairwoman Janet Yellen sounded her concern about the future, it seemed the high-flying dollar would be drug down from its lofty levels. Instead, after a few jolts of volatility, the currency seemed to find its footing rather quickly. The fundamentals present little to hold back a bearish tide had been pressured. Perhaps this is an assessment to the limits of relative devaluation the Greenback is subject to short of more dramatic developments. In the week ahead, US event risk will shape Fed rate speculation and thereby Dollar premium; but once again, the primary motivation for the currency’s moves may come from the cross winds of its major counterparts.
In keeping track of the Dollar’s own fundamental strength according to its rate forecast, the market isn’t fully pricing in the next FOMC hike (25 basis points to a median of 0.625 percent) until after the July 2017 meeting. That does not suggest much in the way of speculative premium behind the currency’s current level. From positioning statistics, the CFTC’s commitment of traders (COT) report shows the least bullish view of the Dollar since the week of August 1, 2014. This does not imply tremendously lofty outlay on the Dollar that can suddenly drop its value with a well-placed surprise. However, despite the quantitative limitations these measure price; the currency certainly maintains speculative value that can be lost with unfavorable fundamental developments.
Whether the USDollar is driven down to 11-month lows or recovers grown lost over the two months will be most readily dictated by a cumulative influence of important data and Fed speak scheduled through the week. A common theme from the US docket will be inflation expectations. Import, producer and consumer inflation figures are due for release. We shouldn’t underestimate the upstream price figures as they often precede what we see at the ground level, but it is also a reflection of ever-critical energy goods. However, most will consider the CPI the decisive measure on this front; and a move towards the Fed’s target is more important than ever given the central banks waver on its motivation for gradual normalization. A special mention should also be made of the University of Michigan consumer sentiment survey. Janet Yellen mentioned that wage growth expectations were important to the Fed’s equation, and the component of wage forecasts from this survey has been mentioned as a preferred reading.
Outside the traditional data channel, the relative strength or weakness of key counterparts to the USD will invariable leverage movement from the Greenback. While the Euro and Yuan are constant concerns, the Japanese Yen should be watched with a greater degree of vigilance. Speculation of Japanese MoF or BoJ intervention on behalf of USDJPYhas hit panicked levels, and such a move would likely benefit the Dollar – albeit temporarily. Just like the faltering QE and negative rate upgrades, direct intervention on behalf of key exchange rates smacks of desperation and is unlikely to render greater reaction than past efforts.
One last key outlet for Dollar motivation needs to be considered: risk trends. Though we have seen a rebound in equities and other risk-oriented assets over the past 5-6 weeks, while the past 11 months has shaped a measured bear trend across the financial system; we have yet to see a systemic fear or greed seize the markets. Frenzied yield appetite is difficult to muster in these conditions, but panic is only a crisis away. Perhaps the IMF’s growth forecasts, its listing of global risks or some unforeseen event revives USD’s haven status. DailyFx