Mixed employment report fails to dampen rate optimism
The more technical elements of U.S. monetary policy have become drivers of the dollar. Two Fed Chairmen and members of the FOMC gave conflicting views of the pace at which rates will be hiked on Friday,
The more hawkish view was voiced by New York Fed Chairman William Dudley commented that once the reining-in of the $4.5tn bond portfolio began, a pause in rate hikes would only be short-lived. Speaking in Australia, St. Louis Fed Chair, James Bullard, a renowned dove, said he saw a longer pause pointing out that the effect of the tightening caused by the draining of $4.5tn in liquidity has on the economy.
Despite the market taking the supporting the hawkish view by driving the dollar, Bullard’s view would appear the more likely. The Fed remains on a three-hike strategy for 2017. Given that we have already seen two hikes, this could be why there has been no advance guidance of either a change in strategy or when the third hike could take place. Interest rate futures markets have priced in the possibility of a hike in June, but careful management will be needed to smooth the path for both interest rates and the currency.
Fed Chair Janet Yellen will be speaking later and there is expectation that she may provide clarity over monetary policy. Her term in office has been characterized by 'advance guidance' - and may be ending in January. It is unlikely that she will be re-elected given the harsh criticism from both the President and Senators.
The employment report released on Friday was a real mixed bag. The headline NFP figure was weaker than expected with just 98k new jobs created. The February figure was also revised down by 7%.
The dollar escaped a real caning since both hourly earnings and the overall unemployment rate remained steady. It will be interesting to see just how much of a correction there is next month.
Syria flare-up, brings risk aversion
The old “risk-on, risk-off” play was back in force as global tensions were stoked by direct conflict (verbal only) between America and Russia. Trumps readiness to release military action against the Syrian regime drew a highly critical response from Moscow.
The JPY held onto recent gains in the face of renewed strength as risk aversion kicked in.
Following on from a missile test from North Korea and the visit of the Chinese President to the U.S., there is plenty to be concerned about geopolitically. Dealers have been more sanguine. Tipping their hats towards risk aversion but skill wanting to buy the dollar since growth is moving at trend and there is a clear path to interest rate “normality” not matched in either the U.K. or eurozone.
This week is less busy on the data front so political and geopolitical events will take centre stage. The French election is approaching but the more Emmanuel Macron gains in the polls, the more recent events in both the U.K. and U.S. come to mind.
There has been no physical response from Russia over events in Syria last week. The British Foreign Secretary has been labelled a 'Washington Poodle' for deferring to the Secretary of State and cancelling a visit this week to Moscow.
Tape reveals BoE involvement in Libor rigging.
An event that will interest bank bashers and conspiracy theorists more than traders and the market at large has broken this morning.
It seems there is a tape that confirms that the Bank of England put pressure on banks (Barclays (LON:BARC) in this example) the keep rates artificially low in 2008 at the start of the financial crisis.
It will be interesting how this plays out given the seriousness with which this whole saga has been treated by the FCA.