Vicious post-Fed rebound sent dollar to best week of the year
US dollar banknotes.
Liu Jie | Xinhua via Getty
The dollar was heading for its best week in nearly nine months on Friday, as investors rushed to factor in an earlier than expected end to an extraordinary US monetary stimulus in the days following a change in surprise tone from the share of the Federal Reserve.
In the two sessions since Fed officials predicted possible rate hikes in 2023, the greenback has broken recent ranges and has jumped about 1.8% against the euro, even more against the euro. aussie and over 1% against the pound sterling and the kiwi.
The dollar index broke its 200-day moving average to hit a more than two-month high at 92.010 and is on track for a 1.5% weekly gain, its biggest since last September.
“The Fed has sent a very crucial message that the days of plentiful, plentiful and unlimited liquidity are drawing to a close,” said Richard Franulovich, head of FX strategy at Westpac in Sydney.
“We can now see an end point towards zero rates… and they told us in very simple English that they started the conversation on how to start reducing,” he said.
“This signal precipitated a dramatic unwinding of the position, as short selling on the US dollar was based on this endless call for liquidity from the Fed and zero rates.”
The majors stabilized at the start of the Asian session and didn’t show much enthusiasm for bouncing back, with only light movements. The euro was just above a two-month low at $ 1.1904.
The Australian dollar parked at $ 0.7555, also near the two-month low of $ 0.7540 that it hit overnight.
The kiwi also perched at a two-month low and fell from its 200-day moving average, despite New Zealand’s much better-than-expected growth figures on Thursday. The British pound was near a six-week low at $ 1.3936.
The dollar is also on track for a 0.5% rise against the yen, which was trading at 110.25 per dollar after hitting an 11-week high of 110.82 on Thursday.
“The nastiness with which the dollar rebounded, its impulsive nature, tells me that there has been a decisive shift for a lot of big obsolete positions,” Franulovich said.
“This is a significant and decisive overhaul in the outlook for the dollar, just because of the nature of the price action over the past two days.”
The upheaval was sparked by the Fed’s forecast, or “dot plots,” showing that 13 of the 18 board members saw their rates rise in 2023, down from just six previously, the median board member forecasting two increases in 2023.
Although the plots are non-pledges and have a bad track record of predicting rates, the sudden change was a shock that spilled over into the bond market and metal prices as well.
Gold has been shaken by the hikes in the dollar and US rates and is on track for a weekly loss of more than 5%.
Treasuries sold off strongly – especially at five- and ten-year maturities – but the U.S. yield curve flattened overnight as traders seemed to be hoping that a more aggressive Fed could act faster to fight. against inflation.
“For us, the main takeaway is that the market’s preconceived idea of a fixed timetable for reduction is not the right way to think about it,” said Elsa Lignos, Global Head of Currency Strategy. at RBC Capital Markets.
“Maybe collectively we’ve convinced ourselves that the Fed is so eager to avoid a tantrum, that it ‘will be forced to follow the market consensus’ – (Wednesday) shows this to be wrong”, she declared.
“Every meeting is now live for a conical discussion. “
Next Friday, the Bank of Japan will end its two-day meeting, but it is expected to maintain its massive stimulus package and may even extend the deadline for its pandemic relief asset purchase and loan program. .