We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Bullish
GBP/USD
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
USD/JPY
Mixed
Gold
Bearish
Oil - US Crude
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Bitcoin
Mixed
More View more
Real Time News
  • Bank of Japan's Kataoka: It is appropriate for the central bank to lower interest rates, BoJ should strengthen forward guidance. Coordination with fiscal policy very important -BBG
  • Looking at my majors-based #Yen index, #JPY could have quite the room to rally on average if there is a deeper turn in equities. The currency has still largely been consolidating since December on average and a break above the January and February highs could mark a bullish trend https://t.co/fIA4BeTmyf
  • The $JPY has lost out to a broadly resurgent US Dollar, with a clearly dwindling band of Yen bulls left to hope that the most recent rise has become overextended. Get your market update from @DavidCottleFX here:https://t.co/7Ndm5jiOi7 https://t.co/nP50B7d4yi
  • The double-edged sword of globalization: Pro: Hyper interconnectedness means everything is transmitted far more quickly. Con: Hyper interconnectedness means everything is transmitted far more quickly.
  • China reports 433 additional #coronavirus cases on February 26 which brings total to 78,497. 29 deaths were also reported bringing total fatalities to 2,744 -BBG
  • Bank of Korea says it will continue to monitor the #COVID19 outbreak (BBG)
  • BREAKING: SOUTH KOREA CONFIRMS AN ADDITIONAL 334 #CORONAVIRUS CASES BRINGING THE TOTAL TO 1595. (BBG)
  • The #Yen may rise after the #WHO reported that most new #coronavirus cases are now emanating outside of China. #SP500 futures are pointing lower with Thursday’s session in focus $USDJPY - https://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/asia_am_briefing/2020/02/27/Yen-May-Rise-as-Most-New-Coronavirus-Cases-Emerge-Outside-of-China.html?CHID=9&QPID=917702&utm_source=Twitter&utm_medium=Dubrovsky&utm_campaign=twr https://t.co/md4R2F0JBe
  • #USDKRW down https://t.co/MJKDR1lPwM
  • Bank of Korea holds rates at 1.25% (BBG)
Dollar Awaits a Clear Read on Risk and Rate Forecasts

Dollar Awaits a Clear Read on Risk and Rate Forecasts

2010-02-24 22:32:00
John Kicklighter, Chief Currency Strategist
Share:

Be sure to join DailyFX Analysts in discussing their outlook for the Fed and its impact on the dollar in the DailyFX Forex Forum

0224fed1

The Economy and the Credit Market

The dollar and US markets were delivered a shock last week when the Federal Reserve announced a hike to the discount lending rate. While this may not seem to hold the same weight that a hike to the Fed Funds rate could have elicited, the implications are perhaps greater than the immediate reaction the dollar and other speculative assets have allowed. While the discount rate is not traditionally the target that consumer and secondary interest rates are based on (not to mention expected returns); it nonetheless has a trickledown effect that will increase lending costs for banks and thereby consumers. It is also important to note that policy officials have said in different forums that the Fed Funds rate wouldn’t be the best reflection of monetary policy through the immediate future. While interest on excess reserves was labeled the best alternative, the evidence of a tightening regime at this point is abundant. Furthermore, this move has critical implications for underlying investor sentiment. Such a move by the world’s largest central bank is a clear step towards withdrawing the very stimulus that facilitated the markets’ recovery in 2009. Removing this safety net is a gamble that confidence in stability and returns can stand on its own. If there is another major financial shock (such as Greece forcing a crisis in the Euro Zone), this move by the Fed will simply feed a more dramatic slump in speculative interests and optimistic forecasts and thereby bolster the appeal of the dollar.

 

 

 

 

 

0224fed2

A Closer Look at Financial and Consumer Conditions

0224fed3

Financial stability a luxury that market participants are growing more appreciative of each day. The Fed’s hike to the discount rate along with the expected reduction in max primary loan terms to an overnight period is perhaps the most clearly defined step towards policy tightening that any of the major central banks has taken to this point. However, it is important to realize that this is just another development in a broad and progressive effort to unwind stimulus that has acted as a spring board and backstop for the capital markets. While this aid is being rolled back, there are also a number of active threats popping up. China throwing the breaks and commercial real estate are notable; but Greece is the danger that has no outcome that avoids turmoil. The reality that the US and global economies are heading for temperate and burdened recoveries is starting to dawn on investors. Market values are the best gauge for speculators’ expectations; and the still-young retracement in capital market benchmarks reflects participants are coming to terms with the restrained forecast. However, it is clear that there is still excess premium built into the markets that must still be worked off to balance expectations to genuine potential. This past week, event risk has been mixed. The Chicago Fed National Activity composite index turned positive for only the second time in 30 months and inflation eased. However, new home sales also hit a record low; and Bernanke repeated his warnings of lethargy.

 

The Financial and Capital Markets

The markets have made little, real progress over the past week. Volatility has certainly reared; but direction and momentum have been notably absence. This is not a new state for the markets however. Underlying risk appetite hasn’t shown any meaningful progress (whether it be bullish or bearish) for nearly three weeks. A rebound from some equity benchmarks and commodities is more of a response to the tumble that developed through since the year began. Evidence of this break between price action and fundamental current can be linked to the relative health of the US dollar. This currency is a key funding currency and is prominently featured as the market’s safe haven. And, through the rebound in these other markets, the dollar has been able to either hold its ground or forge fresh eight-month highs. Investors and speculators are well aware of the looming risks in the market place. Withdrawing government support in the US and globally is making the masses more sensitive to the many risks that exist in the market. At home, the FDIC recently reported a 27% increase in troubled banks through the fourth quarter to its highest level since 1993. Furthermore, write offs for consumer debts, mortgages and other poor performing investments is eroding capital. Looking beyond the US boarders, the troubles are more virulent. Greece in particular poses a considerable threat to stability.

 

 

 

 

0224fed4
 

 A Closer Look at Market Conditions

0224fed5

The upswing in capital markets for capital markets from the February 5th reversal has already run thin on momentum. After having bounced a little more than 6 percent, the Dow Jones Industrial Average has turned once again to a period of congestion. The same stalled progress can be seen in crude, gold and bond yields. What is remarkable for all of these benchmarks is that the advance was not durable enough to push prices back to the highs set in December and January. It is a trading maxim that larger trends are riddled with temporary corrections and setbacks. This seemingly-groundless rebound may simply be a bounce before the larger trend reengages. There is a divergence between the traditional and more intricate indicators of financial risk. The equity-based CBOE VIX has and currency-derived Volatility Index are both well off their respective highs for February and below the long-term historical averages. However, scratching beneath the surface, there are signs that underlying sentiment and market functioning are at risk. Within the United States, we have seen the gap between the 2 and 10-year Treasury paper (the yield curve) hit a record as the government taxes the availability of existing funds and cautious investors stick to safer short-term maturities. Looking at the at-risk markets, debt and default premiums in the EU, UK and Japan have soared.

Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.