US Dollar Looks to Fear, FOMC to Set Off Lasting Bull Trend
London (Mar 15) What will move the US dollar in the week ahead? We are awash in major fundamental catalysts – the type that can generate meaningful trends and not just short-lived bouts of volatility. With benchmark risks measures like the S&P 500, Emerging Markets and yen crosses retreating this past week, the immediate focus moving forward will be the health of global investor sentiment. And, through that day-to-day anxiety, we will also have the next FOMC rate decision complete with updated forecasts and Chairwoman Janet Yellen’s first press conference since taking the helm at the central bank.
In the known – and vague – event risk ahead, there is a clear bias for market impact that benefits the greenback. A surprise for example on the risk front would be a sentiment collapse – a substantial boost for a safe haven like the dollar. Status quo, on the other hand, is something the benchmark currency has theoretically adapted to in its relatively steady performance as of late. From a trading perspective, that translates into a far greater risk of volatility and momentum behind a dollar rally than a tumble.
That being said, we have still seen the Dow Jones FXCM Dollar Index (ticker = USDollar) decline in five of the past six weeks. A story that has gained considerable traction - though lacking for confirmation – is a move by certain major economic players to diversify away from concentrated US (Treasury and dollar) exposures. This past Friday, it was reported that securities held in custody for foreign accounts plunged more than $100 billion – the biggest drop on record. Many speculate this could have been a move by Russia in response to the Crimea situation. This dramatic move aside, the diversification move has been a slow development for some time. The monthly international capital flows account (TIC) has shown net outflow from the US in eight of the last 12 months. And, China has been a big part of this move, with a supposed appetite for Eurozone exposure – hence the EURUSD’s ability to grind out steady gains.