Greenback Looks Vulnerable

Fed Chair Powell struck a responsive chord for investors by indicating that officials can be patient and can respond to changing economic dynamics. Powell, who had been previously praised for his straight-talking manner, was able to ease angst among investors without negating the Fed's assessment that the economy is strong enough to allow the central bank to gradually hike rates and continue to reduce its balance sheet.  

The markets also respond to the economic data. The yield on the 10-year note jumped 11 bp ahead of the weekend, the most since October 3 when Powell had noted that Fed policy was still accommodative and a long way from neutral. The S&P 500 jumped 3.4%, which is a larger advance than any session last year, except for the day after Christmas when it rallied 5%.The pessimism that had such a powerful grip that the investors had begun pricing in a cut in rates in H1 19. This was taken back before the weekend, and the implied yield of the June Fed funds futures contract settled at 2.40%, the same as the current average effective rate (which is also the rate that the Fed pays interest on reserves).

The dollar was mostly softer last week, falling against most of the major currencies but the euro, and Swiss franc and Danish krone that move in its orbit. The big development in the foreign exchange market was the dramatic surge in the yen, a powerful short squeeze ostensibly sparked by Japanese retail investors in holiday-thinned markets on January 3, but spilled over, causing collateral damage. The "flash crash began with the dollar a little below JPY109. It finished last week near JPY108.50, after spiking to around JPY104.85, according to Bloomberg.  

Dollar Index:  

A marginal new high for the year was set on December 14 (~97.70). Since then, it has trended lower to reach 95.65 on New Year's Day, which had not been seen since late October. The technical indicators are mixed, and sentiment is poor. The three-week losing streak is the longest since August. If a sense of the impending crisis eases in the aftermath of the stronger US service PMI, the jobs data, and Powell's comments, the dollar may continue to move lower. We see near-term downside risk toward 95.00-95.30.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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