Financials –
Fed Chair Yellen gave a speech in SF late yesterday and her comments were deemed as slightly hawkish. The dollar firmed modestly following her remarks and Fed Funds dropped slightly. The key comment off the newswires was she and “most colleagues expect ‘a few’ rate hikes” this year. This begs the question, how much is ‘a few’? As noted here several times FF futures have been essentially pricing in two rate hikes for 2017. I have noted that I believe that to be an underestimation of the Fed’s desire to hike rates. It’ll be interesting to watch further Fed commentary in the weeks ahead. This could provide some support to the dollar if they remain hawkish. It might also be interesting to watch FF futures as rate hike expectations could become repriced. As noted yesterday the market is currently betting the under vs. the Fed’s dot plots. It’ll be interesting to see if sentiment changes. March might be a “target” for the next rate hike according to some observers.
Another big mover in FX yesterday was the CD following dovish commentary from the BOC. BOC governor Poloz said that a rate cut “remains on the table if downside risks materialize”. The CD has been a beneficiary of recent dollar weakness and recently reached the top side of its recent trading range. With a dovish BOC and a potentially hawkish Fed, perhaps a visit to the low end of the recent trading range is in the cards (~74.00).
The focus today will remain on central banks and FX as the ECB will announce its updated monetary policy decision this morning. Expectations call for no change in rates or the asset purchase program, but all eyes will be on ECB President Draghi’s press conference for clues going forward. Eurozone inflation has picked up somewhat in recent months so it’ll be interesting to see how much his comments focus on this. It’ll also be interesting to see if he brings up the difficulties in implementing the new allowance for purchasing bonds yielding under the deposit rate and whether they are considering changing their rules on owning a certain percentage of particular issues.
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