Broad-based USD softening ahead of the March FOMC statement immediately reversed higher post-release. The committee acknowledged recent signs of firming in the US economy and said recent oil price increases are likely to be short term in nature, as we noted in yesterday’s RESEARCH NOTE: MARCH 13 FOMC PREVIEW . EURUSD sharply fell -50 pips on a further ‘pricing out’ of overly exuberant QE3 expectations.
Tuesday ended up being quite the busy day for the US Fed. Half an hour after Tuesday’s US equity market closing bell, the Fed also released its bank stress tests a few days ahead of the schedule. Optimistic anticipation from proposed dividend increases ramped up in the minutes leading up to the announcement but the official results ultimately failed to live up to its pre-release expectations:
- Tested banks’ abilities to absorb 13% unemployment and -21% drop in housing prices
- 15 of the 19 largest banks passed
- Worst performers were Ally Financial, SunTrust, & Citigroup with Tier 1 common capital ratios of 4.4, 4.8, & 4.9, respectively.
- Top performers were Bank of NY Mellon, State Street & American Express with Tier 1 common capital ratios of 13.1%, 12.5%, & 10.8%, respectively
Since the Asia open, most G10 currencies have failed to recover their earlier losses vs. USD. While most recent FX ranges are still intact, the path of least resistance for the US dollar seems higher. Growth in China is stalling, a comprehensive resolution for Europe’s debt crisis still hasn’t been delivered, and MENA unrest poses significant risk for a sustainable global recovery.
There is a stark contrast when pitting the US economic outlook versus those of almost every other region outside of North America. This fundamental divergence is starting to play out in FX price action. Improving US data has decreased the scope for QE3 while deteriorating foreign economic indicators have increased the scope for policy easing by the central banks of the respective economies. Overall, the next few months may very well see a fundamentally driven firming for the US dollar. The main risk to continued USD upside, however, would likely come from global central bank policy responses (including the Fed) to negative market shocks. This certainly has the potential to reverse the USD’s most recent fortunes but better US economic fundamentals may result in a slow grind higher instead. Accordingly, still think the potential levels outlined in previous USD long strategies over the past month remain valid medium term targets:
Technically, NZD/USD seems to be in the midst of forming a potential diamond top
(see chart below) which typically materializes following strong uptrends (see chart below) NZD/USD shorts around current levels, 0.8375 at time of writing, with stops placed above the 0.764% retracement (0.8840/0.7570 decline) at around 0.8534 for a total risk of about -159 pips with limits targeting the 0.382 fibo level of the 0.8840/0.7385 around 0.7940 for a total reward of about +435 pips may provide > 2:1 reward: risk value for kiwi shorts.