Dollar Goes for a Nine-Month Rally with Fed Talk and NFPs on Tap

Fundamental Forecast for Dollar: Bullish

• NFPs are scheduled for release on Good Friday – key event risk stirring a key trend on a low liquidity day

• After Yellen’s remarks, the focus intensifies on Fed timing with FF futures still dovish but swaps hawkish

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The Dollar came dangerously close to a nasty speculative spill this past week. While the medium-term fundamental picture supports the currency’s progress over its counterparts, there is enough evidence that the market has ran beyond its quantifiable advantage and is therby exposed to a rebalance. However, it seems to realize a correction in the Dollar’s incredible run, their needs to be a more motivated thrust for profit taking. Soon to close out a record nine consecutive month rally (on the ICE Dollar Index), we face a market more sensitive to week-to-week event risk and a docket that can strike exposed nerves.

Not all market movement must have an academic, fundamental reasoning. In a market derived from a variety of views and objectives, irrationality is unavoidable and pure speculative shifts is inevitable. Therein lies the Dollar’s greatest risk. It has plenty of theortecal advantages it can fall back on for its bullish bearing. Yet, it’s exceptional one-way drive has drawn in more than just the interest rate watchers. Speculators looking to ‘ride the wave’ have different mandates and risk profiles. They act on technical levels, hold no commitment to the long-term and are ready to bail when their profit draws down. For that reason, the distinct trend channel the Dow Jones FXCM Dollar Index (ticker = USDollar) has carved out in its impressive run looks like a moving cliff. Slipping into a dense nest of stops and short entry orders can result in the same tumble as a particularly bad piece of event risk.

With a ‘trader’s’ mentality in mind, bulls head into the new trading week with a little more breathing room. Fed Chairwoman Janet Yellen lended support to to the run in her Friday afternoon speech. As is her method, she offered enough balance to her comments to feed both a dove’s and a hawk’s convictions on where monetary policy is heading. Though potentially interpretive, Yellen remarked that they should not wait until they have returned to the 2 percent inflation target before they move. Given it takes time for policy to filter into the economy, that makes sense. However, from an investor’s perspective, this fits a concerted effort made by the central bank to ready the market for the inevitable – with heavy insinuation that it can happen earlier than many expect.

Indeed, when we look at what the market’s expectations for pricing in monetary policy paths, it is clear that there is plenty of room for adjustment on both sides. The Dollar is perhaps one of the most hawkish reflecting instruments, but that may be due in part to its exceptionally dovish counterparts (particularly the BoJ and ECB). On the other end of the spectrum, we find Fed Fund futures – specifically tailored to hedging rate forecasts – pricing the first hike way out into November and no follow up until March/April of next year. This is enough skepticism in the market that a steady march to mearly meet what is the consensus amongst analysts, economists and primary dealers can generate further Dollar gains.

After the FOMC rate decision two weeks ago and Yellen’s remarks this past week, it is clear that the first hike is increasingly data dependent. That will emphasize the importance of significant fundamental developments in the rates picture. In the register of event risk, few items will outshine the BLS labor conditions report for influence. That said, the March update is due on Friday (Good Friday). From this data though, the wage growth report should be paid specific attention. This is the connection between labor growth and inflation. And, on the topic of inflation, the Fed’s preferred reading – the PCE deflator – is due on Monday. And, between those two high profile book ends, we have no fewer than 10 Fed speeches scheduled. This should be an interesting, speculative week.