Yesterday’s Janet Yellen testimony was more dovish than I or the market anticipated. The US Federal Reserve chair did more or less keep a June rate hike option open, but made it seem not particularly likely as she said that the Fed would not likely raise rates for “at least the next couple of meetings”.
By saying “at least”, she is hinting that the very earliest would be a June meeting (the third meeting after March and April), and then only in the presence of overwhelmingly strong data.
More likely, since the Fed would probably prefer to hike at a meeting that includes a press conference, this means the September meeting is a more likely time frame, and since the market was pricing in something between June and September, this is slightly dovish.
It is also quite clear from Yellen’s testimony that the Fed will remove the word “patient” first before hiking rates, and that once the word has been removed, a hike could come at any time.
Her comments on the economy and inflation offered no real surprises. In response, the old suspects rallied the most against the USD – the commodity dollars, with AUDUSD pulling above the 0.7850 resistance and CAD following suit after a speech late yesterday from Bank of Canada governor Stephen Poloz.
As for the market reaction to Yellen’s comments, it’s tough to argue that this will mean a profound new phase of USD weakness, as the reaction may have mostly been about squeezing those who were looking for an immediate continuation of USD strength.
Let’s see whether there is any follow through today and through the end of the week and how the technical situation looks as we head into next week’s important first-week-of-the-month US economic data. If the USD weakness extends and we get a round of weak data out of the US next week, US bulls may end up suffering for some time to come.
The comments from Poloz on the recent rate cut offered CAD dramatic support versus the USD as he slammed the brakes on speculation that the recent cut in interest rates would lead to further cuts. He positioned the recent cut as “downside risk insurance…[which] buys us some time to see how the economy actually responds.” In the context of the US dollar selling off on Yellen’s testimony, this administered quite a case of whiplash to USDCAD bulls.
Today, we have Yellen out testifying again, and if she is happy with the market reaction, the new round of testimony is unlikely to provide new impetus, but if she feels like her remarks yesterday were misinterpreted as more dovish than she would prefer, there is the risk of her attempting to sound more hawkish.
Some of the US data was lost in the shuffle yesterday, including a very disappointing drop in consumer confidence for February, though the preliminary Feb. Markit US Service PMI did show a healthy jump to 57.0 and thus a four-month high.
Chart: AUDUSD
One of the biggest reactions to yesterday’s Yellen testimony was in AUDUSD, which rallied above the 0.7850 resistance that theoretically opens up the chart for a test of the structurally important 0.8000/50 area. Bears will be ready to growl if we close strongly back below 0.7850 in rejection of this upside break. 
The G-10 rundown
USD: Bulls disappointed by Yellen’s testimony, which keeps June rate option open, but probably only a perfect string of data between now and the April meeting (the very first where it would be possible for the Fed to remove the word “patient"). That means we only have two data cycles. Watching today for any sign that Yellen doesn't approve of the market’s interpretation of her testimony/stance.
EUR: Rallying back into the zone in EURUSD once again as resolution one way or another is delayed yet again. The next focus within the range is the 1.1450/1.1500 area which has held back the last six rally attempts. Watch out for Mario Draghi out speaking later today.
JPY: USDJPY posted a bearish shooting star candlestick yesterday, but we’re waking up to no follow thorough this morning and remain embedded in the middle of the range. 118.00 remains the downside trigger area of interest, and even that one is a bit dubious as we still have more range down toward 115.50 to work with. To the upside, yesterday’s highs are the first resistance.
GBP: Getting ambitious again this morning and poking at the important 1.5500+ resistance area in GBPUSD. Mark Carney and company offered little new in their testimony yesterday and vols are collapsing – not sure what we’re waiting for here, but GBP beginning to look overbought, in my book unless we see a new catalyst.
CHF: More support for CHF selling as the EU “accepts” the Greek letter of reform promises. Watching 1.0650 – 1.0810 in EURCHF.
AUD: The big performer in the wake of Yellen’s testimony and perhaps on hopes that China is about to offer up stimulus and on a stronger-than-expected Manufacturing PMI reading overnight.
CAD: A swoon on Poloz comments, but this has been a pretty persistent range in USDCAD, so let’s see if momentum to the downside in USDCAD builds from here. The range low is down near 1.2365 in USDCAD is the next focus, while a recover above 1.2600 is needed for bullish hopes to pick up again.
NZD: NZD performing stronger on the carry implications of a dovish Yellen. Still watching AUDNZD to see if something bigger may build to the upside. NZDUSD bears will need a swoon back below 0.7450 for interest, while the next resistance level up at 0.7600/50 is important.
SEK: Let’s see if Riksbank can blast EURSEK out of the range and generate any interest.
NOK: Downside potential as Norges Bank's governor Øystein Olsen to speak and he is strongly in favour of a weaker NOK.
The Aussie dollar was the big mover after Janet Yellen's speech yesterday. Photo: istock
Economic Data Highlights
- Australia Q4 Wage Price Index out at +0.6% QoQ and +2.5% YoY as expected and vs. +2.6% YoY in Q3
- China Feb. Preliminary HSBC Manufacturing PMI out at 50.1 vs. 49.5 expected and 49.7 in Jan.
- Norway Q1 Consumer Confidence out at 7.4 vs. 16.5 expected and 13.6 in Q4
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Riksbank publishes meeting minutes (0830)
- UK Jan. BBA Loans for House Purchase (0930)
- UK Bank of England’s Carney to Speak (1000)
- Norway Norges Bank’s Olsen to Speak (1000)
- US Fed Chair Yellen to Speak before House committee (1500)
- US Jan. New Home Sales (1500)
- Euro Zone ECB’s Draghi to Testify to European Parliament (1630)
- New Zealand Jan. Trade Balance (2145)