Fundamental Forecast for Dollar: Bullish
•Volatility measures remain high, but they have not hit levels associated with full scale haven demand
•Fed Chair Janet Yellen reiterated her belief that the first FOMC rate hike will happen this year
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The Dollar may have closed the past week with a gain, but it certainly wasn’t showing the kind of bullish conviction that would project a lasting move. Indecision is likely to give way to a decisive move in the week ahead. There are a range of high-level fundamental themes and catalysts facing FX traders, and the Greenback will find itself at the epicenter of it all. From a break in speculative appetite (risk trends) to a Greek-led Euro drive to a docket stocked with items adept at feeding rate speculation, we are facing one of the most capable environments for generating volatility and momentum we have seen this year.
To open the new trading week, the headlines will no doubt draw most traders’ focus to the vote by Greece’s creditors on whether the proposals offered by the country will meet their requirements for receiving critical aid. This may seem distinctly a Euro issue, but the cross currents to the US currency are profound. From a statistical standpoint, EURUSD is the most liquid currency in the FX market – by a wide margin. Its gravity has a tendency to drag the broader market with it and thereby pull the Dollar around as well.
Heading into the weekend, a late-night vote by Greece’s Parliament cast support for the proposals brought by Prime Minister Tsipras; leaving the decision to rescue the country or see it fall into a financial crisis – and likely exit from the Eurozone – up to its creditors. Unnamed sources by the AFP suggested the creditors had a ‘positive evaluation’ of the proposals, but many such unsubstantiated sentiments have proven false dawns in the recent past. Should a third bailout and debt relief be in the cards, there is certainly a weight on the Euro that can be lifted and indirectly weigh the Dollar for a short time.
Alternatively, if we have finally reached the end of the line for drawn out efforts to salvage Greece’s relationship with the Eurozone; the Dollar’s dominant competition for reserve currency status will find itself fundamentally shaken. Furthermore, a crisis for the Euro-area can prove a more substantial spark for global investor sentiment. Speculative appetites have grown severely arid these past weeks while anxiety has growth to exceptional levels. In fact, this past week, the S&P 500 traced out its highest level of activity relative to its most confined range in over two decades. If we are finally to see a long overdue deleveraging of speculative excess in the near future, the Dollar stands ready to jump back into its role of ultimate safe haven.
There are a lot of moving parts and extraordinary levels of complacency to overcome if we are to see a decisive move on one of the aforementioned themes. However, we don’t need anything nearly as dramatic to jump start trends born out of relative monetary policy bearings. Over the past year, the expected ‘first mover status’ for the Fed on rate hikes forged the best FX performance amongst the majors. This recent pause has come as the market and FOMC’s view for rate timing have diverged. However, last week, Chairwoman Janet Yellen reiterated her belief that hikes will begin this year. Fed Fund futures yielded some ground after the comments. Ahead, we have CPI and Yellen testimony that will further decide just hard the dovish market will fight the Fed’s warnings. – JK