What's a Fed to Do?

March was a very active month in the currency market. The EUR/USD hit an all-time high less than 100 pips away from 1.60, while USD/JPY fell to an intraday low of 95.76. The daily ranges of these two currency pairs have expanded significantly as one-month volatility in the EUR/USD reached the highest level since 2004. With volatility at such an extreme level as indicated by the EUR/USD one-month volatility chart below, calmer times may be ahead for the currency market and in particular the US dollar.

(Source: Bloomberg)

In other words, the days of 200 pip ranges in the EUR/USD may be coming to an end. The price action in the US dollar post non-farm payrolls indicate that traders are very divided on the outlook for the US dollar and more specifically US monetary policy. Three consecutive months of job losses warrant a rate cut from the Federal Reserve, but the job numbers alone may not be enough to convince the Fed to cut 50bp instead of 25.

This week, there is barely any economic data that will shed more light on what type of action the Federal Reserve will take at the end of the month.

The only meaningful US data on the calendar is the trade balance, import prices and consumer confidence which are unfortunately not scheduled for release until the end of the week.

The minutes from the March 18 FOMC meeting could help, but even the Fed has probably not decided how much they should ease at the end of the month. The labor market is deteriorating and will continue to get worse.

I do not expect job growth to turn positive for at least another 6 months. Dell (DELL) and Motorola (MOT) joined ATA and Aloha Airlines in announcing more layoffs. These 4 companies alone will shave 14k from the US workforce. Based on the outlook for growth, the Federal Reserve should definitely bring interest rates down to 1.75 percent on April 30. However by doing so, they are reducing their ammunition and run they risk of stoking further inflation. For these reasons, the Federal Reserve is just as divided as the market, which means that a new trend could have difficulty manifesting itself in the coming week.

Comments

[vrspace]

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[flow5]

Don't be deceived. The exchange value of the dollar is crashing. And the prospect of a turnaround is nil.

[tom kern]

The numbers will change according to daily activities in the market. With spending on the rise, the psychology is that spenders will provide relief to the squeaky wheels . The % 5.1 unemployment number indicates this has and may continue to increase spending at the expense of creditors who are already reaching there limits. The question is more or less. At this point it is probably just a little less than before.