Financial markets are in a holding pattern ahead of a day that is chalked full of event risk, with market participants cautiously waiting for Janet Yellen’s testimony to the Senate Banking Committee later this morning. The successful submission of Greek reform commitments to the EU Commission has done little to spur risk appetite, mainly because while the EU Commission has stated the list is sufficiently comprehensive, it still needs to pass approval of the EU finance ministers, and national parliaments like in Germany and Finland must vote on the changes before the formal extension can be approved. The common-currency has seen little benefit from the latest developments, with EURUSD pivoting on the north side of 1.13 as we head into the North American cross.
While Greece will continue to be in the spotlight over the remainder of the week, the saga will play second fiddle to the chairwomen on the Federal Reserve today, as she delivers her semiannual testimony on monetary policy to the Senate Banking Committee. The beginning of the week has seen market participants positioning ahead of the event for a moderately hawkish sounding testimony from Yellen compared to how last week’s FOMC minutes were digested. Expectations are that while Yellen will highlight the Fed’s data dependent nature, rate normalization as early as June is likely something that Yellen will hint at, a bullish reversion to last week’s FOMC minutes and accordingly we’ve seen the greenback rally ahead of today’s testimony.
While we do believe the minutes from last week were interpreted more dovish then the Fed intended, we would caution Yellen has a tendency to err on the side of restraint in her communication to markets, and therefore warn we could see the USD consolidate some of the gains seen this week. In our view, a June or September rate hike will still be on the table despite some moderating growth signals that will bring Q4 GDP closer to 2% and out of the stratospheric economic growth witnessed in Q3, though today’s risk lies with Yellen emphasizing the Fed’s patient approach to interest rate normalization. From a prudent central banker point of view, and wanting to choose the course of action that shocks market’s the least, the best course of action would be to use these testimony’s to prepare markets for a removal of the “patient” wording at the March Fed meeting if June or September hike is in the Fed’s vision – though if this framing materializes today is anyone’s guess. The rally in the big dollar has taken some of the steam out of the rebound in hydrocarbons this morning, and while positive on today’s session, front-month WTI remains below $50/barrel.
North of the 49th parallel, loonie traders will also have comments from Bank of Canada Governor Stephen Poloz to digest in the early afternoon, with Poloz speaking in London and the text of his speech due to be released at 13:45EST. While many analysts are calling for further rate cuts from the BoC at their March meeting, and expecting today’s speech to frame the language used in next week’s statement, we are of the opinion it is too early to expect another rate cut without seeing a further deterioration in economic data. While last week’s retail sales were dreadful, both wholesale and manufacturing sales for the same month were strong, highlighting the slide in consumer spending in December could be more to do with consumer trends as opposed to the start of a prolonged downturn. In addition, oil has yet to take another leg lower and capitulate further from where it was sitting when the BoC met in January, and therefore we think the BoC would want to retain some flexibility and dry powder if oil does witness another wash-out. That being said, the BoC “punked” markets in January by switching from data dependency to instituting an “insurance-like” rate cut, so there is always the possibility the BoC wants a little more insurance if oil continues to crumble.
Further reading:
EURUSD, GBPUSD, USDJPY Pivot Points, Technical analysis – Feb. 24 2015
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