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March 30, 2016

US Dollar loses footing on Fed Chair comments, commodity markets advance

US Dollar loses footing on Fed Chair comments, commodity markets advance

US Dollar tumbled against its overseas peers after dovish comments of Fed Chair Janet Yellen which diverted attention of investors from US economic improvements to the economic issues abroad. As the dissent in Fed panel increases (regional Fed officials vote for earlier rate hike, while Yellen prefers more discreet posture), the last word is up to FED head. And Yellen proved she holds situation under control announcing clear-cut plan for next rate hikes.
In her speech at Economic Club in New-York she advised investors to turn their focus on economic growth of developing countries and the risks of global slowdown with depressed Oil prices and deflation in some countries. When situation will be improved enough to avoid adverse effects from monetary tightening, it will be appropriate to discuss next rate hike.
The other reason to postpone the liftoff is a strong US Dollar that hurts exporters and transnational corporations (despite positive changes in US economy in almost every aspect – labor, inflation, manufacturing etc., corporate earnings report showed decline for last three months)
The most pessimistic forecast is that next rate hike may happen only in 1-2 years – the time needed for oil market to recover and stagnation in EU and Japan to recede. But major part of market sentiments the opposite – according to CME Group futures data, the probability of rate hike to 0.75 in April is 4.6%, In June it is 25%, and in December it overweighs other expectations with 40.8%. Upbeat economic figures from US for last 3 months demonstrate that the economy is stable enough to weather global economic storm that may be caused by next rate hike (though its also very unlikely and current Janet posture looks like exceptional cautiousness).
So after Yellen revealed the Fed position towards rate hike policy, there was no other option for US Dollar but to experience another severe selloff which extended to today’s trading session. EUR/USD was as high as 1.1365 today, rocketing from 1.1196 yesterday level, now the pair stabilized with 0.30% gains at 1.1324 level. GBP/USD saw upward spike to 1.4459 as well but later was subdued to 1.4388. USD/JPY floated in a range of 112.02 – 112.60% currently placated at 112.59 level. ADP employment change report released today (195K estimate, 200K actual) led to a brisk bidding impulse on US Dollar which wore off quite quickly.

Dollar drop

EUR/USD spike after Yellen speech

Commodity currencies appreciated against the greenback, fueled by growth on energy markets. WTI futures spiked to $40 level, but failed to hold its own under the thrust of bears, enjoying 0.91% gains as of 4:16 GMT. EIA data was in line with preliminary readings of API institute which predicted growth of 2.3M barrels of US crude inventories (the estimate was 3M barrels).

Screen Shot 2016-03-30 at 7.53.44 PM

  WTI declined after EIA release though the readings was in line with expectation

Stocks also advanced, the catalyst of course was weakened greenback, energy and mining shares scored best wins (Anglo American +11.81%, Rio Tinto +5.90%, Glencore +5.39%, Royal Dutch Shell +3.42%)

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