Dollar Generally Higher Despite Lower US Rates

Less USD long position

The dollar was opening higher in Europe against almost all the G10 currencies and the EM currencies that we track even though Fed funds rate expectations ended the day lower Friday and bond yields declined somewhat. Fed Chair Janet Yellen Friday said “conditions may warrant an increase in the federal funds rate target sometime this year” but that rates would rise “only gradually” and that tightening could even reverse if conditions warranted it. These comments were quite in line with what Fed officials have been saying up to now. Judging from the market response though, the statements increased the market’s conviction that a rate hike is coming (hence the stronger dollar) while lowering the market’s assumed path of rate increases (hence lower interest rates).

The Commitment of Traders (COT) report showed that while investors generally became less bullish on USD, reducing long DXY positions and closing out some short currency positions, they increased their net short EUR positions by a substantial 14% to a record short position. This suggests that in addition to USD strength, we are likely to see EUR underperformance in the coming week. Quantitative easing plus Greece’s troubles are probably behind that.


Greece the focus of attention again

Attention today is likely to focus on Greece as PM Tsipras updates Parliament on talks held over the weekend between the Greek government and the group of creditors formerly known as the troika (European Commission, ECB and the IMF). The Greek government apparently has submitted the long-awaited list of reforms to the lenders. According to the FT, officials who have seen the list said that while it contained some concessions, it depended too much on optimistic economic assumptions and suffered from the same lack of detail in some of the areas that have caused concerns during previous talks. In particular, the list failed to include reforms to labor laws and Greece’s pension system, two areas that monitors have insisted are essential to finalising the bailout program but that Greek officials say remain “red lines.” So there still remains a big gap between the two sides.

According to the Greek newspaper Kathimerini, even if there is a broad agreement between Greece and its creditors, it is unlikely that eurozone finance ministers will meet this week or even the week after to approve the release of even part of the EUR 7.2bn remaining in bailout money. Part of the reason is because of the Easter Sunday holiday, which falls this coming Sunday according to the Western calendar and the following Sunday according to the Greek Orthodox calendar. But also it appears that the technocrats have made only “limited progress,” the newspaper said.

The problem is, just how much longer does Greece have? How much more money does it have and how long can it finance itself for? Some reports have said that it will run out of money by April 8th. If so, and they still haven’t worked out their differences by now, then we could be in for some last-minute tensions.

Oil plunges again

Oil plunges on possible Iran settlement Oil plunged Friday as diplomats worked towards a settlement of the Iranian nuclear issue. Settling that problem would free about 1mn b/d supply to come onto the world market, worsening the glut on the market. It may be that market participants expect Iran to co-operate in order to achieve an agreement, which not only would free Iranian oil for the market but also reduces the risk of a supply interruption from Saudi’s incursion into Yemen. I remain bearish on oil because of the increase in US supply, as I mentioned Friday, regardless of what happens with Iran. This would suggest long USD/CAD and USD/NOK positions could be profitable.

Japan industrial production fell

Japan industrial production fell in Feb Industrial production fell 3.4% mom, a larger decline than expected. Some of the decline could be due to the Chinese New Year in February. Nonetheless, the news highlights the fragility of Japan’s recovery and is likely reaffirm the administration’s commitment to a weaker currency to encourage exports. JPY-negative.

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