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Fed throws out calendar, Dax buyers throw out EUR hedge

by Ashraf Laidi

The FOMC statement accomplished the feat of being simultaneously dovish in its recognition of winter time slowdown, while boosting the US dollar by relegating its calendar guidance in favour of data-dependence. The US dollar rallied against all major currencies immediately after the Fed statement, but ended nearly 2 cents lower against EUR, GBP and AUD.

Throwing out the calendar

The main source of the USD rebound in the FOMC statement emerged from the removal of calendar reference, by omitting the phrase: “…the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.”

The elimination of time-specific guidance highlights the Fed’s dependence on the data to the extent that it places the timing of interest rate lift-off at equal footing among the next 2-3 scheduled meetings.

Said differently, an early rate hike (June) would be viable if both of the upcoming jobs reports (April due next week and May due in early June) come up unambiguously strong i.e. above 200K NFPs and strong average hourly earnings.

The message of the Fed so far holds that a September Fed hike is the most probable outcome, while the probability for a June hike is technical possible but not viable.

The FOMC’s mention of winter slowdown and “transitory factors” was in part aimed to attribute the dismal 0.2% growth in Q1 to inclement and weather in the North East and strikes in the West Coast.

Euro rally not over

The other main story of the day is the 378-point collapse of Germany’s DAX-30 index—a 3.21% drop, the biggest in a single day since the eruption of the Spanish/Italian debt crisis in June 2012. The selloff was intensified by asset managers existing from DAX-30, Eurostoxx-50 and other Eurozone equities, which were accumulated since November –coinciding with the ECB’s QE becoming certainty. As asset managers closed out of their Eurozone stocks, so did the hedging arrangements against EUR weakness. The result was a violent decline. As speculators pile on the shorts, the 8% decline in the Dax could well become 12% as technical chase up the 100-DMA. As the shorts rush in, EURUSD bulls could see their own 100-DMA materialize at 1.1300.


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