Last week was all about the strength of the dollar, moves driven by speculation surrounding the March FOMC meeting. Now that the outcome of that meeting is known, it has become a significantly different story.
By Peter Martin
Friday, March 20, 2015
Though the Fed did remove the ‘patient’ terminology from its statement, it also trimmed its economic forecasts, creating some doubt about the likelihood of June being the month in which the central bank introduces a rate hike, and in the wake of the statement there has been a lot of unwinding of long dollar positions in the FX market, a trend that has picked up momentum on Friday.
By early afternoon in New York, the dollar was down sharply against all its major peers: EUR/USD rose 1.96% to 1.0865, with the currency pair on track for its biggest weekly improvement in over three years, while AUD/USD was up 1.98% at 0.7800 and GBP/USD gained 1.54% to 1.4982.
US macreconomic news has been thin today, but there were two significant releases from Statistics Canada. Canadian inflation bounced back in a bigger way than expected in February, the CPI jumping 0.9% on the month, its fastest gain in two years. This followed on from January’s 0.2% decline and the year-on-year change held steady in February at 1.0%. A major driver behind the overall price rise was the steep increase of gasoline prices, though the core rate, which excludes more volatile components such as food and energy, still advanced 0.7%.
In a separate report, Canadian retails sales slumped 1.7% in January, compounding December’s 1.8% decline (originally reported as a 2.0% fall), and this suggests a soft start to the year for the overall Canadian economy. Even with the Bank of Canada having loosened monetary policy recently, this weakness could pave the way for another rate cut in the not-too-distant future., though it will be interesting to see the what benefits are brought by recovering energy prices in next month’s report.
The Loonie advanced today against the US dollar, though not quite as much some other major currencies. USD/CAD fell 1.16% to 1.2565.
A couple of Fed officials made public comments today on the issue of the timing of an interest rate rise. Dennis Lockhart, the head of the Atlanta Fed, floated June, July or September as possibilities, saying, ‘I continue to believe that mid-year or a little later is appropriate timing. That would allow the June meeting to clearly be taken seriously as a meeting for the 'lift-off' decision. I would add to that July. And, of course, September’.
Charles Evans, the President of the Chicago Fed, favors a slower time-frame, saying that delaying a rate hike would not impair the central bank’s control over inflation. Mr Evans leans to the dovish side and has previously signalled a preference for waiting until 2016 to introduce a rate rise. A paper released by the Chicago Fed yesterday, and co-authored by Mr Evans, asserted that ‘a delayed liftoff is optimal’, arguing that monetary policy tools are asymmetric near the zero lower bound on nominal interest rates, and that the Fed would be better-able to contend with a scenario in which a deferred rise leads to higher inflation than a scenario in in which a sooner rate rise leads to excessively weak growth.
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