USD Sold-Off Amid Dovish Fed

 | Mar 17, 2016 06:44AM ET

Market Brief

As we expected, the Federal Open Market Committee decided to maintain the target for the benchmark federal funds rate at 0.25% to 0.5%. However, the market was expecting Janet Yellen to release a more hawkish statement, reiterating the Fed’s confidence in the strength of the US economy. The opposite happened. According to the projections accompanying the statement, the Fed lowered its growth projection from 2.4% to 2.2% for 2016 and to 2.1% from 2.2% for 2017.

On the inflation front, the PCE forecast was lowered to 1.2% from 1.6% for 2016, while the median projection for the core gauge was left unchanged at 1.6%. But more importantly, the median projection for the policy rate fell to 0.875% at the end of 2016 compared to the 1.375% forecast in December, implying only two rate hikes by the end of the year instead of four. Janet Yellen cited the risks posed by recent global economic and financial developments. As a result, the US dollar experienced a massive sell-off as the market had priced in more hawkish statement and projections. EUR/USD rose almost two figures to 1.1240 amid the publication.

The biggest winners from yesterday are commodity currencies, buoyed by the rally in crude oil. The West Texas Intermediate has risen more than 7% since Wednesday morning and is now trading at $39.30 a barrel. Gold surged almost 3% as Janet Yellen spoke, while silver was up 2.90%. Overnight, iron ore was also better bid as the most liquid future contracts on the Dalian commodity exchange, rising 2.53% to 426 yuan/metric ton. Copper futures were also trading higher, up 2.15%.

In Wellington, the New Zealand dollar surged 3.60% against the greenback as traders priced in fewer rate hikes by the Fed. The kiwi erased last week’s losses and returned to its pre-RBNZ-rate-cut levels at around $0.6825. Similarly, the Aussie rallied widely to $0.7645 as it finally validated a break of the 0.7440 resistance level (high from August 11th last year). The EM complex also reacted positively to the prospect of a longer period of low US rates, with EM currencies posting strong gains. The Indian rupee settled up 0.83%, the South Korean won surged 1.70%, while the Indonesian rupiah was up 1.40%.