- Street waits for Yellen this afternoon
- Middle East Tensions subside
- Forex liquidity remains at a premium
- Market trying to avoid lopsided trades over Q1 end
U.S. dollar buyers are back with a vengeance as the street waits to close out the week once U.S gross domestic product data has been released this morning, and more importantly, after the Federal Reserve Chair Janet Yellen’s speech this afternoon at 15:45 ET about monetary policy at the Federal Reserve Bank of San Francisco conference. Titled, “The New Normal for Monetary Policy,” Yellen will answer the audience’s questions afterward. On rare occasions like this, the market may get an unexpected surprise.
For the time being, the dollar bull seems to be encouraged by number of factors. First, the slow grind higher in U.S. front yields (U.S. one-year +7 basis points to +0.25%), partly due to a continued recovery in crude prices (WTI $50.25), and second, some hawkish comments from Atlanta Fed President Dennis Lockhart. Even geopolitical risks are giving a helping hand to the dollar.
Tensions in the Middle East, stemming from Saudi Arabia and its allies’ launch of a military campaign in neighboring Yemen, seems to be easing somewhat this morning. This should subtract some of the risk premium that has been priced in over the last two trading sessions. A large percentage of the dollar’s strength should be attributed to the market’s recalibration of geopolitical risks, allowing some risk appetite to gain traction.
Liquidity at a Premium
With month-end, quarter-end, and Japanese financial year-end fast approaching, and the start of earnings season near, investors will be trying to avoid taking any lopsided positions. Hence the reason for some of the dramatic intraday forex market moves.
These forex moves highlight the lack of market depth concerns expressed by both dealers and investors. Last week, the EUR managed to swing +8% in a matter of hours after the Federal Open Market Committee statement, and earlier this week after the release of U.S. consumer-price index, the dollar suffered a +1% whiplash move. Even the Bank of England is worried about market liquidity, not specifically for forex, but capital markets. With the Fed trying to wean the market off central bank dependency by pushing investors toward data dependency, coupled with the lack of product depth to grease the European Central Bank’s quantitative easing wheels, expect market volatility to persist. Even the interbank dealers have their own problems. Few are unwilling, or cannot afford, to run the risk and very often currency prices become a premium. For now, this is the new norm. Heightened volatility certainly provides more market opportunities, but it also requires more patience, and a very disciplined risk management approach.
EUR Rally Comes Unstuck
The only thing that the ‘tech’ market is assured of at this moment is that the EUR does not like heights. Price action above €1.1000 was unsustainable again. The single currency’s weakness (€1.0818) from yesterday’s bull trap high at €1.1052 is currently regarded as part of an irregular flat correction. This is expected to remain the case while EUR support at €1.0775 holds. So far this morning the market has attempted to bottom fish for the weak EUR ‘long’ stop-losses located atop and just below the psychological €1.0800 handle. A sustained market break below the support trend line (€1.0775) would alter market scenario rather quickly, exposing €1.0697 and last Sunday night’s low €1.0613.
On the other hand, the EUR bull needs to recapture territory above €1.0935 to feel more comfortable. Through €1.0970 and the psychological €1.1000, it should be exposed once again.
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