Another currency to climb the peak

23 March, 2017

The comments of the FED officials Erik Rosengren and Loretta Mester gave new life to the theory of accelerated withdrawal from the accommodative monetary policy.  Both representatives unambiguously hinted that the FED forecast for a rate hike may be underestimated, as strong economic data and a hunt for yields in the market creates real threats to the economy going into overdrive, gradual tightening may prove ineffective. Mester, who has not vote in shaping the FED’s policy, said that the rates should be increased faster than the forecast of the FED implies. She also added that the policymakers should start to deal with the $4.5T balance sheet and abstain from the narrow vision of raising rates.

However, the Dollar posted a muted response to those rhetoric, as post-election euphoria being the main catalyst for growth, evaporated. USDX went up slightly on Wednesday, mainly due to a rebound from the support level of 99.50, which was triggered on Tuesday. As noted earlier, the dollar still has much space to adjust lower before further growth, so the outlook for the currency remains moderately bearish.

Oil traders post growing confidence in OPEC impotence against the revival of American drilling companies. The reports of the research agencies shift the timeframe for clearing the glut on the market for an indefinite period, so the oil market has gone into selling without looking back and is not going to change direction yet. The strip of disappointing data API extends: oil hubs added 4.5 million barrels totalling at 533.6 million, exceeding expectations by 1.7 million barrels.

As noted in the previous review, the break of the level of 112 – 111.75 in USD/JPY will be a signal for further decline. The pair sank to the border of 111.00, what is also facilitated by speculations that the US stock market has gone too far in the rally. In addition to hedging throughput options (as evidenced by the CBOE skew index), investors are also moving into defensive assets, such as gold or yen. Precious metals have slowed down the pace of recovery, but have a further potential for growth on the wave of risk aversion.

The Nikkei index lost more than 300 points as market anxiety propelled demand for the Japanese currency, which often has an inverse correlation with the Japanese stock market. Strengthening the yen is painfully tolerated by local exporters, which are the main component of the index.

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