It’s a down day for the dollar ahead of the Fed this afternoon. The dollar index is weaker by 0.4% with notable strength in the British pound and Swiss franc spearheading weakness against the dollar. The currency market is buzzing ahead of today’s FOMC statement, which will confirm the completion of $1.75 trillion in mortgage backed securities and agency debt by the end of the first quarter. At this point there is no immediate need to expand, while any weakness in the spring housing season is likely to be the next catalyst for further government support. But the most likely catalyst for nearby direction for the dollar is likely to stem from whether more (or less) members start to back away from the use of the “extended period” phrase whose omnipresence defines a recession that is clearly easing. All it might take is further one-month bounce back employment report to leave the Fed feeling shackled to the mast, unable to reach the captain’s wheel in a vessel that suddenly needs a change of direction.
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U.S. Dollar – The dollar is taking it in the neck on Tuesday morning. Yet that’s not to say that dealers are favoring an unchanged policy nor are they expecting with cast-iron conviction the Fed to maintain its use of the same phrase. Such expectations might underestimate the building strength of the U.S. recovery and would argue that the dollar should shoot higher if the Fed indeed shifted to a less certain monetary path ahead. The Fed doubtless wants to achieve this although its timing is uncertain at this stage. A rebound in the March employment reading could leave them looking in the rear-view mirror, wishing they’d been a little more diligent. But some of today’s vulnerability is to be found in better perceptions for competing currencies.
British pound – A stretch in the lead for the opposition Conservative party as exhibited by up to date political opinion polls is making the swollen ranks of sterling shorts think twice on Tuesday. The pound initially lost ground after a draft European Commission proposal noted that the British government must do more to rein in its budget deficit. To be honest, this was like throwing a bucket of water into the ocean. The well-flagged £178 billion deficit equivalent to 12% of GDP is a known difficulty and we all know that without harsh measures, the loss of the sovereign credit rating will be a done deal. Dealers found to their chagrin that an overnight loss in the pound to $1.4978 was short-lived. Whether or not a firmer reading of housing prices in the year through January played any role in reversing today’s decline is suspect, but the fact remains that the pound rebounded to where it stands at $1.5135. A DCLG house price survey showed U.K. home prices rose by 6.2% in the year through January.
Euro – The euro is also a half cent higher against the dollar this morning at $1.3722 with a positive response given to the all-important ZEW sentiment survey. The March survey revealed a reading of 44.5 and although slightly down from the February data point, dealers realized that this was not a bad result in lieu of the recent turmoil facing the Eurozone. EC inflation data for February came in at 0.9% and was slightly down from the January reading of 1% indicating prices remain neutral and pose no threat to stability.
Japanese yen – The dollar is losing ground marginally to the yen on Tuesday with one dollar buying ¥90.25. Whatever the Fed says this afternoon may well pale against what the Bank of Japan has to say on Wednesday morning. Their statement looks highly likely to include further stimulus measures. The yen was weaker to the euro, which rose towards ¥124.00. Against the pound the yen also slipped to ¥136.77.
Aussie dollar – The Australian dollar is somewhat curiously lower against both the U.S. dollar and the Japanese yen overnight, despite the expected delivery of a promise to further raise interest rates as the economy improves. Minutes from the March RBA meeting revealed a need to lift policy back to a normal setting but without defining a stopping point. Market opinion is split on two counts. There is no conviction that the market expects an April-time rate increase and so appetite for the Aussie dollar, plumped by recent gains, is a little tepid for now. Second, while some investors expect rates to top out at 5% compared to a current 4% policy setting, others expect perhaps an ultimate move to 6% or even beyond. For now, that’s a story for another day. The Aussie is marginally lower despite broader U.S. dollar weakness at 91.39. U.S. cents.
Canadian dollar –The Canadian dollar is starting to suffer from what onlookers refer to as a “crowded trade.” Growing popularity of the Canadian dollar as a reserve currency amongst central bankers as well as being a unit that might get a bigger lift from the eventual rising tide of monetary policy has put the loonie firmly on the radar screen. Rising equity and crude oil prices continue to bolster underlying demand for the unit, which today spiked to a peak of 98.57 U.S. cents as the local dollar attempts a push at parity.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. firstname.lastname@example.org
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