• Investors are betting no rate hike
  • But NY Fed President expects strong Q2
  • ECB may curb lending to Greek banks
  • Aussie dollar stronger

With very little data, the currency market was (for a change) uneventful yesterday.  So, I had a chance to dig into the futures market data to see what investors are thinking about the timing of the Fed rate hike.  Why?  I believe this timing will determine how the dollar will fare this year.

The Eurodollar futures are a popular tool used by investors to place bets on the direction of US interest rates.  The value of future contracts goes higher when interest rates move lower.  This is because the investors will be compensated less by holding the contracts until their maturity.

When I compiled the weekly changes in Eurodollar futures, it is clear that the number of investors who are buying Eurodollar futures or betting on lower interest rates is at the highest number since May 2013.  And this sentiment has intensified during the past month.

april-22 graph

So what’s up?  It seems that recent soft economic data has convinced many investors not to count on the rate hike this year.  Instead, the bond yields may go lower in response to a slowing economy and low inflation. And, if they’ve called it correctly, then the dollar that has rallied sharply in anticipation of higher interest rates early in the year will likely give up much of its gains.

That said, I stand with New York Fed President Dudley, who said, “The first quarter weakness will prove to be largely temporary.”  And, I am betting that the impact of the harsh winter and the closure of 29 West Coast ports in February will gradually dissipate. So, I still expect the Fed to hike the rate, and the dollar to resume its rally this year. Stay tuned.

EUR-USD climbed higher this morning on the news that the ECB increased the lending cap to Greek banks.  My calculation shows that Greek banks now have about €3B until they run out of cash.  The concerns over the possible Greek exit from the Eurozone will continue to cap the euro from making any gains.  There are no major reports or events due today.

GBP-USD is higher this morning. The Bank of England meeting minutes read mildly more hawkish, suggesting that the Bank is considering a rate hike after the election.

CAD-USD remains unchanged.  With little data, the loonie is expected to track oil price movement today.

AUD-USD is trading higher.  March consumer prices increased more than expected.  But, I still expect the Reserve Bank to lower the cash rate in May.  Recently, the Reserve Bank Governor commented that a weaker Aussie dollar is needed to “achieve more balanced growth.”

Have a great Wednesday!