Intraday Market Thoughts

Dollar Rips as Market Eyes Fed Forecasts

by Adam Button
Sep 18, 2014 0:10

The Fed failed to deliver any kind of significant change in rhetoric but forecasts that showed a more aggressive path of rate hikes sparked a large US dollar rally. The Australian dollar was hit hardest as it tumbled to 0.8951. Japanese trade data is due later but all the focus is on the SNB and Scottish referendum.  In our Premium Insights, the 3rd $USDCHF long hit its final target of 0.9400 from the 0.9180 entry for 220 pips. The  NZDCAD Premium short from 3 weeks ago hit it's final 0.8940 target for currently 180 pips. Our existing CADJPY longs are currently netting over 90 pips.  All these trades with their charts and rationale are in the Premium Insights.

The main Fed focus ahead of the decision was on the inclusion of the words “significant slack” to describe the labor market and “considerable time” to describe when the first rate hike would come after QE3. Neither was altered as the doves remained in control.

However, the hawks made some progress with Fisher adding his dissent to Plosser's and 14 members now expecting a hike in 2015, up from 12. But perhaps the most notable change was in the dot chart as the median estimate for the end of next year rose to 1.375% from 1.125%.

Yellen and other Fed members have lamented the dot chart in the past and even talked about removing it because of the mixed signals that it sends. On the dovish side, the Fed added some language about low inflation after a soft CPI report.

We don't question the wisdom of the market but looking at the statement alone and knowing the lousy history of Fed forecasts we struggle to see a clear justification for the level of dollar buying following the statement. An alternative view is that the strength of the dollar rally represents the pent up demand for USD that was sidelined ahead of the Fed and unleashed afterwards.

In that case, the dollar rally could have much more room to run.

The focus now shifts to the Scottish referendum. The final opinion polls showed the No side ahead 2-6 points. The largest poll placed the anti-independence side in the lead 52% to 48%.

In the aggressive round of US dollar buying that followed the Fed decision the pound held up better than its rivals in a sign that traders are betting that independence will fail. That could mean the cable rally following the results could be short fed


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