Anxiety over Greece seemed to offset the dovish read of the FOMC minutes. The US dollar was little higher on the week against both the euro and yen in choppy trading conditions. The much-followed Dollar Index closed marginally higher on the week.
Over the course of the week, the market expectations of an Australian rate cut in early March was downgraded. The recovery of milk prices and official comments indicating the RBNZ is in no hurry to reserve its recent rate hikes, helped support the New Zealand dollar. On the other hand, weak data and dovish comments weighed on the Canadian dollar. The Bank of Canada is widely expected its second rate cut of the year in early March.
Sentiment toward the dollar was weakened by soft economic data and new doubts about a mid-year rate hike. The implied yield of the December 2015 Fed funds futures contract fell five bp over the course of the week to 49 bp. We expect Yellen’s Congressional testimony will push back against the dovish interpretation. However, the risk of a negative year-over-year headline CPI print may blunt the Chair’s guidance.
The euro, which had traded as high as $1.1450 in partial response to the FOMC minutes, broke below $1.13 ahead the weekend for the first time since February 11. Still, the euro continues to chop around a $1.1250 and a $1.1450 range. We are more inclined to see modest upticks at the start of the new week as an opportunity to add to the short euro position, or increase hedge ratios, especially ahead of Yellen’s testimony.
The dollar was confined to narrow ranges against the yen. The prevailing range is around JPY118.50 on the downside and JPY120.50 on the upside. Technical indicators are not generating strong signals though we expect a somewhat firmer dollar. Soft Japanese inflation figures at the end of next week may renew speculation that the BOJ will have to take more action to reach its inflation target. That said, the risk of this seems minimal in the next few months. Over the intermediate term, we anticipate that the BOJ will either extend its time frame for reaching the inflation target, or more formally look past the decline in energy prices.
