Temporary Relief for the US Dollar?

March was a very active month in the currency market. The EUR/USD hit an all time high less than 100 pips away from 1.60 while USD/JPY fell to an intraday low of 95.76. The daily ranges of these two currency pairs have expanded significantly as 1 month volatility in the EUR/USD reached the highest level since 2004. With volatilty at such an extreme level as indicated by the EUR/USD 1 month volatility chart below, calmer times may be ahead for the currency market and in particular the US dollar.

EURUSD1MONTHVOL
Source: Bloomberg

In other words, the days of 200 pip ranges in the EUR/USD may be coming to an end. The price action in the US dollar post non-farm payrolls indicate that traders are very divided on the outlook for the US dollar and more specifically US monetary policy. Three consecutive months of job losses warrant a rate cut from the Federal Reserve, but the job numbers alone may not be enough to convince the Fed to cut 50bp instead of 25.

This week, there is barely any economic data that will shed more light on what type of action the Federal Reserve will take at the end of the month.

The only meaningful US data on the calendar is the trade balance, import prices and consumer confidence which are unfortunately not scheduled for release until the end of the week.

The minutes from the March 18 FOMC meeting could help, but even the Fed has probably not decided how much they should ease at the end of the month. The labor market is deteriorating and will continue to get worse.

I do not expect job growth to turn positive for at least another 6 months. Dell and Motorola joined ATA and Aloha Airlines in announcing more layoffs. These 4 companies alone will shave 14k from the US workforce. Based on the outlook for growth, the Federal Reserve should definitely bring interest rates down to 1.75 percent on April 30. However by doing so, they are reducing their ammunition and run they risk of stoking further inflation. For these reasons, the Federal Reserve is just as divided as the market, which means that a new trend could have difficulty manifesting itself in the coming week.

1 Comments

  1. Absolutely yes, the economy let Bernanke choose rate cut for 25-50 bp. But no room for more cut, it could be the last time. (if choose 25 cut, will have another 25 cut). CPI is another power that let Bernanke head ache, this trend could strong. Food prize will give political leaders more problems for the world. The business circle let jobs loss, 300K even 500K jobs cut that we could see in the next months. The circle never ends till economy warm up, the 4th quarter could see some signals. Subprime losses will be released more on Asian and European banks; this could let the markets lack of liquidity. PMI Chicago and companies job cut of recently really gives me a lot concern, my concern is the balance sheet of consumers. Subprime crisis is the first bomb in the credit market; the next bombs will be released after 3-4 years later. That time could be the final crisis for US economy.

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