- Fed’s normalization data dependent
- Dollar longs feel the squeeze
- Eurozone PMIs continue slow recovery
- EUR bulls break €1.1000 look for €1.1200
The dollar bull has been suffering greatly since last week’s dovish Federal Open Market Committee meet. The market’s conviction that the USD can rally from here has certainly taken a pounding, but they have to keep faith in the process of normalization of the Federal Reserve’s monetary policy. That is to say, a return to data dependence and lift off as fundamentally it will eventually boost the dollar. The problem for most of the traders holding long dollar positions is whether they have the risk appetite or the funding to stay true to their convictions throughout this market’s short squeeze. Even the timing entry of new dollar longs is taking a beating. The Fed’s expectation for the greenback is that coming policy changes will likely boost the dollar. The switch from “patient” to “not impatient” signals that normalization is coming, but there is reluctance to do so in June for fear that the dollar strength’s will get out of hand. The market prefers to price in a September hike or even further out the curve.
Dollar’s Rise Slows
Since the Fed’s “patient” omission, it’s not unnatural to witness the pace of the dollar’s appreciation slow after some of the massive outsize gains against the majors so far this year. In fact, it’s normal for any currency to consolidate after such a move, especially with such positional interest at stake. Historically, following large moves, the USD has tended to trade sideways for several weeks at a time, and this time is no different. The Fed has basically shifted the market’s focus toward data dependent releases in justifying its stance and currency positioning.
The bulk of the dollar’s rise this year has been driven by the euro’s and yen’s weakness. Rate differentials brought about a change in monetary policy at the Bank of Japan and European Central Bank (ECB) which obviously favors the dollar. It’s reason enough why the greenback has been able to outperform despite some mixed U.S. data of late. There will be a turning point that will not automatically favor the dollar, but that probably will not occur until the market is much further along the U.S. “normalization” route.
This dollar negative squeeze, initiated by the Fed, is certainly painful for many. However, the big picture dynamics remain intact. From here it’s all about day-to-day position management. The structural drives for a lower EUR are very much in place, but short-term positioning and the overshooting of rate differentials would suggest that the single unit still has room to climb (€1.0975).
Eurozone PMIs Point to Slow Recovery
March’s small rise in the eurozone composite purchasing managers’ index (PMI) adds to signs that the slow recovery has continued in the first quarter, but France is still performing poorly. The increase in the headline economy-wide output index, from 53.3 to 54.1, was slightly better than the consensus forecast of a rise to 53.6, and left it at its highest level in four years. After rising in January and February, too, the average for the first quarter now points to a rise in quarterly gross domestic product (GDP) of about +0.3%.
For France, there is no sign of sustained pickup in the economy as the first quarter draws to a close. France’s March composite PMI fell to 51.7 from 532.2, month-over-month. As expected, growth in the services sector eased after a strong February, while manufacturing activity continued to decline. However, there are some hopeful signs: new orders are on the rise for the fourth consecutive month and employment increased for the first time in 17 months. And while businesses did cut their prices, they did so at the slowest pace in six months.
In contrast, the German economy appears to have picked up momentum in the first quarter. Its own composite PMI rose to 55.3 from 53.8 in February — an eight-month high. Activity increased at a faster pace in both manufacturing and service sector. This should continue, especially with new orders rising at the fastest pace in nine months. The positive signs for the ECB are that German businesses are hiring new workers and are raising their prices for the second straight month.
Euro Breaks Psychological Barrier
The better-than-expected PMIs have helped lift the EUR to briefly peek above the psychological €1.1000 handle. It’s not just the upbeat data that is pushing the dollar lower or pulling the EUR higher, market participants continue to adjust their positions accordingly. The huge EUR/USD fall (down to €1.0464 last week as ECB quantitative easing got underway) has EUR bulls eyeing scope for a larger correction. The €1.1062 (March 18) high is seen as too small. However, its low (€1.1098) after the Syriza Party’s win in Greece that put Alexis Tsipras in power could be a tough hurdle to overcome.
The euro bull is looking to the €1.1200-1.1300 handle for midterm relief. However, they will require further easing of pressure from the rates market to fuel further EUR gains. So far this month, fixed-income traders have managed to shave -12 basis points off the two-year Treasury/bund spread. It seems that EUR speculators are happy to set up buying dips below €1.0900 and €1.0875