Fundamental Forecast for US
Dollar: Neutral
- US Dollar plummets as Fed hints at QE3
- Suddenly-downtrodden Greenback nonetheless fights back at key support
- Forex market volatility continues near five year lows – how do we trade?
The US Dollar (ticker: USDOLLAR) posted its single-largest weekly decline against the
Euro in six months, hounded by speculation that the US Federal Reserve would
soon implement a fresh wave of Quantitative Easing (QE3) and tumble in US
Treasury Yields.
Official commentary from the US
Federal Open Market Committee sent the US Dollar sharply
lower as FOMC officials candidly discussed a fresh wave of monetary policy
easing (QE3). Traders immediately increased their bets on large-scale asset
purchases, and US Treasury yields fell sharply on the likelihood that Fed would
work to keep interest rates depressed.
A relatively empty economic calendar for the week ahead suggests
that further USD tumbles are relatively less likely. But what could potentially
force the US Dollar to defy expectations and continue lower against the Euro
and other FX counterparts? The second week of September may bring the next
market-moving catalyst on the scheduled US FOMC rate announcement, a European
Central Bank monetary policy decision, and a potentially critical German ruling
on the legality of the European bailout plan.
In the meantime, there is modest risk that next
week’s Economic
Policy Symposium in Jackson Hole could
bring important announcements from Fed Chairman Ben Bernanke and ECB President
Mario Draghi. Bernanke famously used his 2010
speech at Jackson Hole conference to say
that the Fed was prepared to provide further accommodation—all but guaranteeing
the second wave of Quantitative Easing (QE2). Recent FOMC rhetoric may take the
surprise factor off of any Fed announcements, but it will likewise be interesting
to listen to the ECB’s Draghi on the future of the bank’s intervention in
sovereign bond markets.
The Dow Jones FXCM Dollar Index finally broke out of its
3-month consolidative range, and we’ll admit that the movecaught us by
surprise given our earlier forecasts
for further range trading. To paraphrase a
popular quote in finance: when the facts change, we change. And we would change
our minds and shift our US Dollar bias, but the truth is that the facts are
mostly the same.
Implied volatility expectations from FX options prices are still
near five-year lows—making big currency moves unlikely. We would further argue
that major macroeconomic risks to the Euro Zone and the dangers of sharp
slowdowns across the world’s most important economies should favor the
safe-haven US currency.
Seasonal tendencies suggest that currencies
are most likely to set monthly highs and lows in
the first and last week of each month, and that pattern could see the US DOLLAR
break its month-to-date lows in the week ahead. Yet it will likely take a much
larger catalyst to force a more significant breakdown. We’ll remain on alert
for unexpected developments out of Jackson Hole, but it might otherwise be
another week of directionless summer trading.
Happy
Trading
Terry
B.
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