Week In FX Americas - Qualitative Guidance And Yellen Drive USD Upwards

by: Dean Popplewell

By Alfonso Esparza

The USD finished the week ahead of all major currencies. Wednesday’s Federal Open Market Committee and the following press conference with Janet Yellen were the main highlights. This was the first FOMC meeting of the Yellen era and it did not disappoint. The actual FOMC statement had all the expected language and it came with the forecasted $10 billion in further reduction to the stimulus program. There was a break away from the Bernanke era focus on the unemployment rate. Yellen put to a vote the fact that the Fed should move away from the single reading which does not take into account several factors. The Fed would now base its decision on several factors and take inflation into account.

This is nothing new, as it is the job of central banks and not a single reading to base their monetary policy on. This was in fact part of the pro-transparency move by Bernanke where he was trying to look for a single reading that could signal to the market an imminent rate hike. Now that the reading is close to hitting the mark the fact that the economy might not be ready comes to the front. Yellen is changing the guidance form a simplified version to one that is more complex and gives the Fed more leeway.

Then what was considered by some to be a “rookie” mistake when asked about a potential timeline for the end of tapering and the beginning of a rate hike cycle she answered: “six months”. That means that if the current tapering pace continues the process would have done away with stimulus by fall of this year. A hike in spring of 2015 would then happen according to the Fed chair’s words.

The Fed members complained openly to reporters when, last summer, Ben Bernanke introduced the concept of tapering spooking the emerging markets into year lows. The market deemed to be overreacting to the then Fed Chair statement. Now more than 8 months later the same mistake seems to have happened. The USD has given up most of its strength as the economic indicators do not reinforce a scenario where the economy is healthy enough to do away with low rates.

Yellen and company left plenty of room in their FOMC announced new guidance to avoid the Bernanke 6.5% unemployment trap.

The Bank of Canada was part of this week’s ill advised statements. Governor Stephen Poloz had the tough job of following now BoE Governor Mark Carney as head of the BoC. Poloz’s comments about the economy slowing down and needing a rate cut made the CAD lose 0.7 percent and this is ahead of a pro rate hike Fed statement that made the loonie lose an additional 0.9 percent.

Economic figures contradicted Governor Poloz, as inflation posted a healthy 1.1 percent in February and retail sales had a similar 1.3 percent increase beating the forecasts. The CAD recovered some of the lost ground versus the USD on the back of positive indicators.