Thoughts from the Trading Trenches for March 2015
22 Years ago | February 27, 2015 6/6/23, 12:00 AM
In this issue:
- Slam Dunk Month for the Dollar?
- Video: Forex Trading Outlook for March
- Proprietary Trading Patterns and Unique Trading Strategy
Slam Dunk Month for the Dollar?
The month of March was supposed to be a slam dunk for the dollar with monetary policy divergence supporting the currency. We have already seen numerous central banks ease policy this year (including ECB QE due to start in March) and the wait is for the other shoe to drop with the Fed signaling a rate hike. In this regard, attention is squarely on the March 17-18 FOMC meeting but FRB Chairwoman Yellen may have stolen the thunder from it. Let me explain.
The key phrase in the FOMC statement that everyone has been focusing on is: Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The key word is patient as dropping it from the statement was seen as a forward guidance signal for a rate hike two meetings hence. In an effort to be transparent, the FOMC boxed itself into a corner by putting the focus on the word patient.
Yellen, in her monetary policy testimony to the Senate Finance Committee on February 24, changed the focus by suggesting that removing patient forward guidance was not a monetary policy signal. Instead, it was an attempt to create flexibility for a Fed that wants to be data dependent in deciding when (not if) to start normalizing policy by raising interest rates. She indicated that the decision whether to hike rates will be made on a meeting by meeting basis.
What Does This Mean for Trading?
Odds favor the word patient being dropped from the March FOMC statement but this should not be taken as a signal to raise rates. Instead, the market will likely be hyper focused on U.S. data and expectations over the timing of a Fed rate hike will be influenced accordingly.
This suggests volatility around U.S. data highlighted by the release of the February employment report on March 6. How the dollar reacts will give a clue to its relative strength and whether the strong close to February after a month of choppy consolidation will follow through.
The outlook for the dollar, meanwhile, remains positive but interest rate expectations (e.g. June or September for a liftoff?) could influence trading in the short-run. Otherwise, it seems just a matter of when, not if the Fed starts to normalize policy, a sharp contrast to easy monetary policies in other countries. Scroll below for my forex trading outlook video for the month ahead.
Other factors to watch:
ECB QE starts in March and becomes a reality after seeing markets front run it by buying Euro zone bonds and stocks. The reality is that the supply of euros will increase by ECB printing and to the extent that it leaks to other currencies will impact the exchange rate. Low yields as traders/investors front run QE should continue to limit the EUR upside.
Japanese fiscal yearend seems to have become less of a factor in recent years but bears watching as related flows can have an impact on the exchange rate. For the year to date, USDJPY has confounded by trading lower vs. the dollar but more in period of choppy consolidation than seeing momentum for a trend.
January Effect: This pattern, which has not worked the past few years, is one where the high or low for the EURUSD is set in the first month of the year. However, the January Effect is still a pattern that is watched so the range for the first month of the year at 1.2108-1.1098 is worth watching, especially the low as that is most at risk.
Video: Forex Trading Outlook for March
Proprietary Trading Patterns and Unique Trading Strategy
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