The dollar has been on a tear in the past 2 weeks. The Dollar Index has risen from around 95 to hit a peak of 100 in the past few days. This level of 100 was the highest since 2003. The big question is whether the rally is going to continue. My impression is that one word, “patient” could be crucial.
The 8 month rally has seen the dollar appreciate by over 25% meaning that the US dollar is currently engaged in its one of its sharpest rallies on record. This move is greater than the move seen in mid-2008 of around 23% (but covered in more time), whilst the dollar was also engaged in a 36% rally during 1980 to 1981 but over a longer period (across 13 months).
“The trend is your friend until it ends” is a famous technical analysis quote. This would suggest staying with the dollar rally. Whilst we saw a mini correction on Thursday, the dollar bulls could now be held back for long and on Friday the move is gathering momentum once more.
The sharp recent acceleration has come on the back of the Non-farm Payrolls data that showed 295,000 jobs were added in the US in February. That is a good number and adds backing to the Federal Reserve’s assessment of the US labor market as being “strong”. There is now a fixation with just one word “patient”. The word in the Fed’s statement that apparently prevents the FOMC from raising rates for the next two meetings.
There has barely been any significant US economic data in the days since the Payrolls report. However, traders got a surprise yesterday when Retail Sales came in with a disappointing third consecutive monthly decline. The dollar suddenly came under pressure. The pressure only lasted a brief couple of hours in the end as the dollar bulls regained their poise, but the move was an interesting insight into what we might be set for in the coming months.
If, and it is a big “if”, Janet Yellen and the FOMC remove the word “patient” from its statement on Wednesday there will be another burst of dollar strength. However that could be just a gateway to significant volatility in the forex major pairs in the coming months. The market would then be on tenterhooks with EVERY announcement of tier 1 economic data. “What does this mean for Fed tightening?” will be asked over and over again. Every data disappointment will result in a sharp move away from the dollar, whereas strong data will simply increase expectation of the beginning of the tightening cycle.
The cautious nature of Janet Yellen is likely to mean that the Fed will as much as possible try to manage this difficult period of exactly when it is going to begin tightening. The truth is the exact timing does not really matter, whether it is June, September or even later. What matters ultimately will be the speed of tightening. And for that We will be interested in what the latest FOMC dot plots have to say. The Fed meeting will be very interesting next week.