Dollar Bid Ahead of Yellen

Amid relatively light news, the US dollar is bid.  The euro is back to the lower end of its range, straddling the $1.1300 area.   The dollar is at eight-day bests against the yen near JPY119.50.  Falling commodity prices, a soft New Zealand inflation expectations survey, and the prospects for additional easing by the Reserve Bank of Australia (March 3) and the Bank of Canada (March 4), are weighing on the dollar-bloc. 

 Sterling is slightly softer as the MPC testify before the Treasury Committee.   The message seems to be that prices pressures, though low now, can rise quickly when the drop in oil prices fall out of the year-over-year comparison.   The short-sterling futures curve has steepened, with the implied yield of the back months rising more than the near months.  

Several officials cited the widen trade deficit as a potential risk to sterling.   The UK is widely expected to be the next major central bank after the Federal Reserve to hike rates.  Although the market favors early 2016 as the BOE's lift-off, there is still some risk it takes place late this year.  

Federal Reserve Chair Yellen's testimony today is anxiously awaited.  The market read last week's minutes dovishly.  We think this was in error.  Since the January FOMC meeting, a clear majority Fed speakers have kept a possible June rate hike on the table.  The minutes did not really remove it.  

We suspect that Yellen will emphasize the data dependency of monetary policy over a date specific commitment.   Her testimony will likely set the framework of the March FOMC meeting.  In order to keep a June hike possibility alive, the FOMC will drop or dilute its commitment to "patience".   This word clue was defined by Yellen as two meetings. 

There are a number of participants that expect a dovish tone from Yellen.  They argue that the likely negative CPI year-over-year print (due Friday with the January reading), the slowing of the US economy and the weak global economy will stay the Fed's hand.  They also highlight the large long dollar position held by speculators. 

The other major issue today Greece.  Apparently, yesterday's shuttle diplomacy apparently paved ground for an agreement today on the measures Greece will undertake exchange for continued funding.   The Greek stock market was closed yesterday and today it is building on last week's gains, rising 6.3% in early afternoon dealings, led by a 10% rally in the financial sector.   Meanwhile, the 10-year bond yield has slipped below 9% for the first time in a month.  The 3-year yield is below 13.5%, after peaking near 22% on February 10. 

Much of the media coverage has emphasized the four month extension that Greece is being granted.  However, we do not read it quite that way.  Yes, there is a four month extension, but the review in April is critical.  The risk is that April brings a new confrontation between Greece and its official creditors.  We are concerned that the uncertainty and fear in Greece have led to a significant disruption of economic activity, including tax collection. 

Lastly, we note that the Nikkei Asia Review reported a falling out between the Abe government and the BOJ.  Apparently, Prime Minister Abe was not in favor of the late October surprise expansion of the BOJ's QQE program.  For their part, BOJ officials are disappointed with the weakening fiscal credibility stemming from Abe's decision to delay the next leg of the sales tax increase. 

Many participants seem of two minds.  On one hand, they typically defend the independence of central banks.  On the other hand, they seem to be critical when a central bank exercises its independence as the BOJ has done, and the Swiss National Bank did last month.  At the same time, with the BOJ buying nearly all the new supply of Japanese government bonds this year, the concept of independence itself needs a serious re-think.