Wednesday, February 15, 2017

"Yellen Helps the Dollar Extend Streak"

The run is getting a little long in the tooth (consecutive days anyway). DXY 101.43 up 0.19.
From Marc to Market:
The Dollar Index's ten-day rally was at risk yesterday, but Yellen's reiteration of the commitment to continue to lift rates gradually helped extend the streak to eleven sessions. This surpassed the streak around the election (November 7-November 18).  With today's gains, it may draw closer to what appears to be the long streak, 14 sessions between April 30, 2012 and May 17. To put it slightly differently, the Dollar Index has not had a losing session this month.   

Although Yellen's comments were seen as dollar-positive, the impact on the outlook for Fed policy did not change very much.  Consider that implied yield of the March Fed funds futures slipped half a basis point to 0.69%.  The average effective Fed funds rate is steady at 66 bp presently.  The implied yield of the June Fed funds futures contract rose to 0.84% from 0.825% while the implied yield of the December contract rose three basis points to 1.13%.

Turning the yields into odds of a hike, the Bloomberg's calculations suggest a 34% chance of a March hike (was 30%) and 73.5% chance of a June move (was 71%).  The odds that by the end of the year the Fed would have delivered three hikes this year (lifting the target range to 1.25%-1.50%) is 26.4%, up from 24.4%.  The CME's calculation is less sanguine about the near-term but converges with the Bloomberg calculation of the odds of three hikes before the end of the year.  

Yellen did not seem to break fresh ground yesterday. She stuck close to the FOMC statement in her economic assessment.  All meetings are live, including March.  If there was something new, it might have been that the Chair did not see using the unwinding of the balance sheet as a policy tool, such as to remove accommodation.  We thought that it could be used like that.  The time frame is not clear, but it appears discussion will begin shortly, and many look for an announcement toward the end of the year, with implementation beginning sometime year.  

There are two things to note here.  First, the initial steps will likely involve not reinvesting the maturing issues.  This has been the basic message for some time.  Second, managing of this process will likely not be under Yellen's watch and has we have discussed, the composition of the Board of Governors will change dramatically over the next eighteen months.  President Trump will appoint at least three of the seven governors this year and two next year.  During the campaign, Trump was critical of the low interest rates and accused Yellen (sic) of doing so for political purposes.  Many think that as President, Trump will favor easy money, but the institutional mandate of the central bank will not change (unless Congress does so and it would take quite some time)....MORE