Why the Dollar Rallied on Yellen?
A rate hike is one of the most straight-forward trades in markets – you buy the currency – so when the Fed projections and Yellen's comments suggested hikes sooner, the US dollar soared. USD was easily the best performer while JPY lagged and CAD fell to a four-year low.
The Fed's $10 billion taper and elimination of the 6.5% employment threshold were no surprises. The 6.5% pledge was replaced with a promise to look at a broad range of employment and inflation indicators and a statement saying it's “likely” to keep the Fed funds rate unchanged until a “considerable time” after the taper ends.
The statement itself wasn't hawkish and didn't hold any surprises but the Fed also released forecasts and they showed a few Fed members inching rate forecasts higher, suggesting more willingness to raise rates last year. Yellen was quick to downplay those forecasts in the press conference, saying almost nothing had changed in the Fed's collective mind since December.
However, Yellen followed that with by saying a “considerable time” is about 6 months. That comment added another leg to dollar strength because it gives a rough timeline for the first rate hike. If the taper winds down in late-October, as expected it would mean a rate hike around this time next year. That's 3-6 months faster than the market was expecting.
The dollar ended about a cent higher across the board. There were some technical damage in all the dollar pairs but cables break below the March lows and USD/CAD's break to a 3-year high were the most notable.
Look for Fed members to appear in the financial media in the days ahead to try to re-calibrate expectations. They will not want to be boxed in by Yellen's timeline.
Early in Asia-Pacific trading the New Zealand dollar fell even through Q4 GDP rose 0.9% to meet expectations. The market was looking for something better after strong recent trade data. The prior quarter was also revised down to 1.2% from 1.4%.
|Gross Domestic Product (Q4) (q/q)|
|0.9%||0.9%||1.4%||Mar 19 21:45|
|Gross Domestic Product (Q4) (y/y)|
|3.1%||3.0%||3.5%||Mar 19 21:45|
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