Open season on the USD ?

Open season on the USD?

On or below the surface, the FOMC statement would suggest its open season on the dollar and greenlights sellers to re-engage as the Fed failed to confirm any of the markets hawkish suspicions. At the end of the day, while the 25 basis point was all but expected, the FOMC is forging a cautious path for the remainder of 2018. Not to mention the board painted a very circumspect path for 2019-2020 dot projections, suggesting this sitting Fed board is going to be no less data dependent than yesteryear which has policy gradualism painted all over it.

Given this more dovish scenario, Dollar bears have the green light after the FOMC failed to embrace a more hawkish tack which should ultimately cap support for USD from policy divergence perspective. Leaving the dollar extremely vulnerable amid ECB or BoJ policy normalisation rhetorics or more profound US political wobbles, particularly around the shifting US trade policies.

Currency Markets

The Dovish Fed outcome should be a green light to sell USD despite the potential for a steeper interest rate path in 2019-20. At this stage, that’s mear conjecture in the face of possible dollar negatives such as trade war escalation, burgeoning US budget deficit, and the political storm clouds that continues to engulf the Trump administration. Markets should view this outcome as a solid signal to re-engage USD short vs EUR and JPY.

The Japanese Yen

Whichever spin you want to put on the FOMC statement, the dovishness is all about not wanting to rock the global equity market boat given the massive geopolitical tail risk facing markets. Also, the market continues to underprice the prospects of the BoJ draining the punch bowl which suggest the downside skews remain intact
The Euro

Speaking of underpricing policy. As the Fed policy matures, the ECB is only entering the early stages of policy debate. With the USD support capped from policy divergence perspective, the opportunity to ride the shifting ECB policy wave should come back in vogue.

The Australian Dollar 

The Australian dollar, after trading at bearish extremes, is getting a respite from the overwhelming wave of USD negativity permeating through G-10 markets. But going forward I expect the currency to trade  like a canary in the iron ore mine while the shifting  narrative on the  US-China trade war escalation provides the broader backdrop

The Malaysian Ringgit

Despite yesterday tepid national CPI print lessening the chances for a 2018 BNM followup rate hike, the dulcet FOMC overtones should provide a boost to Ringgit sentiment, even more so more so with Brent Crude tracking towards $70 per barrel. The MYR should be back in the game after a fortnight off the grid.
Equity markets

Equity investors are very restrained suggesting they view the statement as balanced but continue to express concerns about President Trumps protectionist trade policies, particularly towards China While there been some easing in the NAFTA rhetoric; the equity markets remain in limbo as the Whitehouse is expected to announce new trade sanctions directed at China.

Oil Markets

The Energy Information Administration reported a drop in inventories of 2.6 million barrels for the week to March 16 confirm the estimated stockpiles decline from the API earlier in the week. But when factoring in possible supply disruptions from rising middle east tension and concerns about Venesualan supplies, Oil prices are trading firm. The Oil Bulls are revelling this morning with both the fundamental narrative and geopolitical landscapes supporting prices in tandem. Good day to own a  piece of the oil patch.

Gold Markets

Gold prices rocketed through the critical $1330 resistance level as the dollar bears are expected to relish this opportunity to re-engage USD short positions.And if you factor in the significant near-term geopolitical concerns and the uncertain equity market fall out from an escalation of a trade war with China, Gold has to be a mainstay component in any investment portfolio which should provide a positive tone for the Gold markets today.

With US interest rates looking lower for longer we could see a pick up in physical demand as many investors were holding off buying for fear of a quicker pace of rising US interest rate

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes