Today is a defining day for the trading week. Four board members of the Federal Reserve are scheduled to publicly speak today, from Williams to Dudley and Kaplan, not forgetting the Fed Queen, Janet Yellen. Their comments, and especially those of Janet Yellen, will have a very strong impact on the way the USD will perform for the rest of the week – which, on its turn, will affect the performance of all other currencies against the USD, as well as of Commodities, gold and oil.
Gold has recently corrected sharply from its recent rally highs. The USD has staged a recovery against almost all currencies, and especially against Commodity and oil currencies, but this recovery has, for now, reached a wall. The central-bank-dependent markets are now waiting for the Fed to clearly signal or explicitly announce what it will do when it comes to the rate hike cycle. Traders are also paying attention to Draghi’s and Kuroda’s next words, since both the ECB and the BOJ want their currencies weaker against the USD – whereas China’s PBOC is trying to surgically devalue the CNY in as controlled a way as possible, countering CNY short bets of large hedge funds and also trying to manage its current problems.
With central bankers’ words being harder to predict than ever, it must be said that several Fed board members have recently came out to say that everything is in place for the rate hike cycle to progress, maybe even as early as April. If today these Fed officials, and mostly Yellen, voice their intention to fast-forward the rate hike cycle, the USD should break this choppy waters where it has been in the recent days to the upside.
While it is possible that Yellen, and/or some of her colleagues make a dovish instead of a hawkish statement, Ridge Capital Markets believes that this is an unlikely scenario. It is our impression that the recent Fed voices in defense of a fast rate hike cycle have been attempts to salvage the Fed’s credibility, which got importantly damaged in Yellen’s last press conference. The US economy, according to the official figures, is signaling every essential conditions that the Fed said should be met for a normalization of interest rates to move forward. So, if the Fed does not stick to its own word, its credibility can be damaged beyond repair. Plus, stock markets are at their all-time highs, fueled by nothing but a Fed-induced support – which has been creating a very dangerous bubble that the Fed should begin to deflate.
Having said this, Ridge Capital Markets stands by our recent USD bullish calls, so we recommend traders to go long the USD/EUR currency pair, because we believe that the USD will finally begin to claim back grounds from the EUR’s recently unsustainable strength. In the same way, we also believe that traders going long the USD/JPY pair are likely to make a profit – still, with Kuroda being the most unpredictable wild card in the world of central bankers, we believe that the USD/EUR bet is a safer trade for investors to make for this week.