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Dollar U Turns as Hawkish Yellen Spreads Her Wings

  • Kathy Lien
  • 15 June 2017

Daily FX Market Roundup 06.14.17

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

 

The Federal Reserve raised interest rates by 25bp today and Fed Chair Janet Yellen's optimism plus hawkishness caught the market by complete surprise. Traders leaned heavily into short dollar positions after this morning's weak consumer spending and inflation reports.  Economists had been looking for retail sales growth to stagnate but instead they contracted by -0.3%, the largest decline since January 2016. Demand for products outside of auto and gas also fell short of expectations last month.  Consumer prices turned negative, driving the year over year inflation rate down to 1.9% from 2.2%.  After these reports, investors were sure that the Fed would drop its plans to raise interest rates again this year and we would hear mostly dovish comments from Janet Yellen.  Instead the complete opposite happened.  The Fed maintained its view for a third hike in 2017 and aside from acknowledging the drop in inflation, which she downplayed by attributing to one off factors, everything Yellen said was hawkish.  She put on a brave face, talked up the improvements in the labor market and economy and shared the central bank's plans to reduce its balance sheet by unwinding asset purchases.  The dollar traded sharply higher in response. The Fed also raised its GDP forecasts, lowered its unemployment rate estimates and cut its projection for inflation.  However the lack of follow through after Yellen's testimony tells us that investors don't believe Yellen.  The proof is in the pudding or data in this case and it is telling a very different story.  Nonetheless, with the Fed looking beyond the recent weakness and seeing the need for another hike this year, losses in the dollar should be limited. Buyers are likely to swoop into USD/JPY near 109.25 with sellers coming into EUR/USD from 1.1215 to 1.1250. 

The Swiss National Bank and Bank of England are up next. No changes are expected from either central bank.  Recent Swiss data has been mixed with stronger GDP and CPI growth offset by lower retail sales and manufacturing activity. So the central bank will most likely reiterate its desire to see the Franc lower. 

As for the BoE, having just updated their economic projections, no major breakthroughs are expected this month.  Although the following table shows improvements in spending, jobs and inflation, Governor Carney is worried about low wage growth and the impact on household demand.  Combined with the latest political uncertainty, there's very little reason for the BoE to express fresh optimism or alter its guidance.  If Kristin Forbes continues her dissent in favor of a hike, we may see a shallow rally in GBP.  If she votes to keep policy unchanged we will see a sharper decline and if another member joins her tightening bias, GBP/USD could hit 1.2850.  Retail sales are due for release ahead of the rate decision and we are looking for a pullback after the strong rise in April.

 


 

The Australian and New Zealand dollars are in play this evening.  Both currencies performed very well today and only gave back part of its gains post FOMC.  Of the 2, we believe that the New Zealand dollar will outperform this evening with GDP growth expected to rise strongly in the first quarter.  Retail sales and trade has been significantly better translating to solid growth in the first 3 months of the year.  Australian labor market conditions on the other hand should weaken with job growth slowing in the services and manufacturing sectors according to the latest PMI reports.  If we are right on both reports, AUD/NZD could sink down to 1.04.  USD/CAD rebounded off its lows today on the back of lower oil prices as crude was crushed by the inventory report but even with this recovery, the downtrend remains intact.  

 

 

For more information, they can be reached at http://www.bkforex.com/.

 

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BKForex Advisors LLC will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on BKForex Advisors LLC. BKForex Advisors LLC do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought. 


About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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