There have been times since he took over the FED presidency from Janet Yellen that Jay Powell’s job looked unenviable. October last year, for example, when the chairman had to calm a liquidity drought using severe repo operations, must’ve been a particularly stressful time for Mr Powell. The minutes released from the FOMC’s latest meeting, the document detailing the conversation that took place during the rate-setting body’s January sit-down, showed relative calm. The Committee saw lower systemic risk in markets as a result of trade which was a classic scape goat for economic vulnerability last year. The monetary authority’s mention of the Coronavirus (the first mention so far) was limited suggesting their position is that the virus does not carry similar risks to global trades as does White House foreign policy. Mind you, these minutes are from January’s meeting and the escalation in infections and subsequent deaths since this meeting could leave a surprise in their next minutes.
Sovereign yield in the States versus Germany is over 2% per annum. This differential has given impetus for the carry trade and bearish sentiment underpinning EURUSD. The business as usual message from the Federal Reserve last night has done nothing to upset that dynamic and could even be seen to strengthen the Dollar further as confidence around US yield supremacy was bolstered. There were no major shifts last night given the news was confirmatory not revolutionary but the support was just enough to push the Dollar index to its highest level since May 2017.
Futures markets priced in little change on the back of the minutes and still saw a 10% chance of a cut in interest rates at the March meeting and a 45% chance of a cut by the end of June. Upside risks to the index that would usher in further Dollar strength come from these expectations being priced out further and a data-led shift to hiking expectations within the Fed. But the Dollar buyers and Euro sellers might have one thing on their side that could present credible downside risks to the Dollar. Unfortunately, it might come in the form of a rather unpredictable individual with floppy hair.
It’s been a while since @realDonaldTrump attacked the Federal Reserve’s policy for the export-killing Dollar strength that it has created. Last time the President weighed into the currency market the reaction was limited. However, history does tell us that the Treasury can intervene in the FX market. Severe policy actions under the administrations of Clinton, H. W. Bush, Reagan, Carter and Ford saw billions of USD purchased per day by the Treasury in the market. Typically these have been interventions to prop up the Dollar but there have been similar episodes of strong Dollar selling to weaken an over stimulated greenback. It’s a long shot and following the worst start to EURUSD since 2015 and the put-to-call price being most in favour of the Dollar since September last year, the bearish EURUSD episode might not be over just yet.
Discussion and Analysis by Charles Porter