• So much noise over a rate hike
  • Fed is data dependent
  • Temporary relief from Greek debt crisis
  • Bank of Canada will not do it again

During her bi-annual testimony before the Senate Banking Committee yesterday, Fed Chair Janet Yellen managed to brilliantly pull off what a Fed Chair is supposed to do – keep the market guessing!

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The US dollar drifted with no clear direction against the major currencies as a cacophony of analyst rate-hike calls swirled.  For example, a self-anointed king of bonds, Bill Gross with Janus Capital Group, wrote immediately following the Fed Chair testimony that, “Yellen testimony signals June lift off.” At the same time, CNBC published on their site, “Yellen: No rate hike for next couple FOMC meetings,” suggesting that the rate hike could be much later in the year.

As discussed in earlier updates, one of the key and statistically proven factors of currency movements is the relative interest rate differences. Therefore, when and if the Fed raises the overnight interest rate from the current post-recession low of 0.25 percent to 0.50 percent then hundreds of billions of global savings, in search of higher yields, are forecast to move into the dollar assets including bonds, certificate of deposits and corporate papers.

Why?  The Eurozone overnight interest rate is currently at 0.05 percent, which is lower by ten factors in comparison.  And with the European Central Bank getting ready to launch its monthly bond buying program next month, the Eurozone interest rates and bond yields are expected to remain well below the US equivalents. On the other side of the globe, the official Japanese overnight lending rate remains at 0.00, and there is absolutely no indication it will be going higher in the next few years.

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So when will the Fed raise the overnight interest rate?  Fed Chair Yellen did make it clear yesterday that the rate hike timing will be dependent on upcoming data on the economy.  Therefore, even though the Fed Chair will be testifying to the House Finance Committee today, most analysts will be keeping an eye out for this Thursday’s release of January consumer inflation report.  If inflation continues to remain well below the Fed’s target of 2 percent then the dollar could retrench from recent highs on the expectation that the rate hike is many months away.  Stay tuned.

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EUR-USD has continued to trade around 1.1350 level overnight.  All indications suggest that the Eurogroup will accept Greece’s last minute proposal of austerity measures in exchange for a 4-month bailout loan extension.  Therefore, it seems the Greek debt crisis has been temporary subdued for now.  That said, the underlying structural problem of Greek solvency has not been addressed, and the crisis could flare up again in June. European Central Bank President Mario Draghi will be giving a speech on ECB’s monetary policy this morning.

GBP-USD has steadily rose to 1.5470 early this morning as the dollar failed to gain any momentum after Fed Chair Janet Yellen’s testimony yesterday.  Today, markets are waiting for the commencement of parliamentary testimonies of Bank of England Governor Mario Carney, which is likely to give some insight on a possible rate hike perhaps later in the year.  Stay tuned.

USD-CAD fell to 1.2460 after Bank of Canada Governor Stephen Poloz implied in his speech yesterday that the March rate cut was an insurance measure for the economy.  Consequently, the bank will most likely not cut the overnight lending again next month.   There are no major economic reports or events scheduled for today.

AUD-USD finally managed to gain some ground overnight and is trading near 0.7846 early this morning after learning that there is a good chance that the Fed will not be raising the short term interest in June.  In contrast, the Reserve Bank of Australia is expected to lower the interest rate next week.

Have a great day!