By Michael O’Neill Agility Forex, Senior Analyst
There are barely two weeks remaining until the frenzy that is March Madness, begins on the Ides of March.
For seventy-eight years, basketball fans and punters have known March Madness as the annual NCAA College basketball tournament. Players trade baskets for the chance of winning the tournament while punters trade greenbacks on the outcome of the games.
That date was a big deal even 2100 years ago. Julius Caesar got tingles down his spine (actually, it was a pugio that he felt and it wasn’t a tingle but a series of sharp, life-ending punctures) and Rome got a new emperor.
Will USD bears be Caesar to Ms. Yellen’s Brutus? Phot: Googleimages
This year, the US Federal Reserve may create their own version of March Madness. The second Federal Open Market Committee (FOMC) policy announcement and press conference in 2017, occurs on March 15th. That day, some traders will be shredding losing tickets and muttering “Et tu Janet?”.
The FOMC members projected three rate increase in 2017. Fed Chair Janet Yellen and her colleagues have said time and time again that rate hikes would be data dependent and since January, the US data has been robust. A gaggle of Fed speakers over the past few weeks seem to agree.
On February 22, in a speech in New York, Federal Reserve Governor Jerome Powell, a voting member, said “going forward I see it as appropriate to gradually tighten policy as long as the economy continues to behave roughly as expected.”
Philadelphia Fed Chair Patrick Harker said that a rate hike was on the table in March, in an interview on February 17 and repeated his calls for three rate hikes in 2017 on February 21.
Federal Reserve Chair Janet Yellen was a lot subtler when she testified before the Senate Banking Committee on February 14th. Yet many analysts believe she kicked the door wide open to an interest rate increase in March when she warned “waiting too long to remove accommodation would be unwise”.
The March meeting is close enough to the end of the first quarter to ensure that the Fed would be on track to achieve their desire to “warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run”.
The FOMC officials are speaking but US dollar price action and the CME FedWatch tool say that traders aren’t listening.
The FedWatch tool has the odds for a March rate hike at just 22%. EURUSD is well off its 1.0493 low seen on February 21 and has recouped 50% of its losses from February Feb 17. The EURUSD decline was due to a mixture of Eurozone specific issues (French elections and Greek debt negotiations) but a dash of March rate hike dismissal gave it a lift.
More telling is the plunge in USDJPY from 114.96 to 112.54. If those traders believed that March 15 was a live date for the Fed, USDJPY would be pushing 115.00. It’s not. Its probing the lows.
The New Zealand dollar is another example of traders dismissing the chances that Janet Yellen and company will pull the trigger on an interest rate move. NZDUSD dropped from 0.7235 to 0.7130 on February 21, after Ms. Yellen’s Congressional testimony. That was the bottom and Kiwi is back trading where it was before Ms. Yellen’s speech. Did everyone forget what she said?
Bank of Canada Governor Stephen Poloz deliberately reminded markets that Canadian rate cuts were on the table. That statement served to put a floor under USDCAD at 1.3000. FX traders have downgraded their fears of a Fed rate move, looked at the firm (and rising) oil prices, ignored weak Retail Sales data and concluded that USDCAD has more downside. Will the floor be concrete or straw?
The stage is set for a nasty FX move and it will be driven by US dollar bulls. It doesn’t take an advance degree in nanoscience to understand that if 78% of the market do not expect the Fed to raise rates in March, a quarter point bump would lead to a sharp spike in the US dollar.
Numerous Fed speakers in the past three weeks have all delivered relatively upbeat assessments of the US economy. They all agreed that US rates will be rising in 2017. The employment data supports a move and even inflation shows signs of stirring.
The Fed isn’t the only player with a match to light the fuse on“a US dollar rally. President Trump is waiting in the wings to announce what he described as “something I would say over the next two or three weeks that will be phenomenal in terms of tax”. That comment was only two weeks ago, and the FX market appears to have forgotten all about it.
Will dollar bears be Caesar to President Trump or Janet Yellen’s Brutus? Time will tell..