Saturday March 28, 2015 - 12:52:32 GMT
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So What Happened to Super-Dollar? -- March 29, 2015
News Doesn't Favor a Change
There appear to be several items at work that have undermined USD strength. On March 18 the Federal Reserve removed the key word "patient" from its policy statement. However, in her press conference afterwards, Fed Chair Yellen left the markets with doubts about the future strength of the U.S. economy and a tightening policy bias after the central bank lowered its growth and inflation forecasts from earlier this year and changed the emphasis of policy to raising the inflation rate back to its target level. This means that employment is no longer its primary target and a rate hike is not imminent. It will take more time to raise prices and wage rates than it would have taken to meet employment targets. Furthermore, the Fed indicated that the stronger USD has been a drag on the economy. These factors caused some second thoughts for the most aggressive of the dollar bulls.
On the other hand, the monetary policy of the European Central Bank (ECB) is locked into a strategy of aggressive money expansion for a year or beyond. Over time, this strategy can only undermine the EUR and boost the USD. Keep in mind, successful trading (or hedging) is all about timing.
Oftentimes markets move for no other reason other than they have to. If too many traders get into the same position, it is inevitable that at some point that positioning will have to become more balanced. The recent rise of the USD against the EUR has been one of the fastest on record, leaving long USD positions "top-heavy". The mid-March Fed decision was a catalyst for a much needed consolidation of positions. For the reasons indicated in the fundamental analysis above, this correction is setting the stage the next USD leg higher. Of course I am assuming that those fundamentals do not change.
This weekend sees the adjustment ("Spring forward" in clocks in Europe and the U.K. to summer time, North America and Europe will return to their typical time differentials. The following weekend will see Australia and New Zealand move their clocks in the opposite direction for winter. The initial major piece of news this week is March Eurozone flash inflation data on Tuesday. The flash estimate is usually not changed much when final data are released. Early Wednesday sees the latest Bank of Japan quarterly Tankan survey. This is a closely-followed economic indicator. Over the day Wednesday sees a slew of final Manufacturing PMIs. Friday is the Good Friday holiday in many centers It will see the March U.S. employment report in a holiday-shortened session. Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland
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