Being patient for volatility

February 25, 2015

In the wake of Fed Chair Yellen’s testimony yesterday, the algo and machine readable news programs will be set to buy the dollar when the word “patient” is removed from the Fed statement. Yellen stated that the removal of this word, which replaced the phrase “considerable time” for keeping the current rate that existed up to the December Fed meeting. In sum, the impact was to weaken the dollar, push stocks higher and delay future dollar volatility and gains. Stocks were also modestly firmer as a result. Whilst core inflation and also market based measures of inflation expectations are near multi-year lows, it remains difficult to see the Fed making the first move on rates, especially as there are plenty of examples of central banks that have made the first move (ECB and Japan in recent times) only to have to reverse.

The other interesting move yesterday was on the Canadian dollar, with the currency wrong-footed by the tone of central bank Governor Poloz speech yesterday, which emphasised that the surprise January easing had bought the central bank some time. This was seen as reducing the chances of a March easing which the market was pricing in to some degree. The good news is that Greece is off the immediate agenda after yesterday’s agreement (beyond German parliamentary approval), but it’s not going to be far from the headlines over the coming few months. The euro was modestly firmer immediately after and was also dragging its feet in the weaker dollar tone in the wake of Yellen. For today, there are no major releases. ECB President Draghi speaks to the European parliament, which but euro volatility should not be strongly affected by this.

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