Dollar Drop Extends Post-Fed, Stocks, Bonds and Commodities Rally

The Federal Reserve's cautiousness has sent the dollar reeling.  The Fed's backtracking to two hikes this year from four is still met with skepticism by the market.  It previously had a June hike nearly discounted but has not pushed that out until September.  

With a backdrop of  BOJ, and ECB and PBOC easing policy, and the Federal Reserve reducing the number of hikes it anticipates, the recovery from the turbulent start to the year continues.   Although the Nikkei slipped, the MSCI Asia-Pacific Index rose 2% to its best level since early January.  It is up 14.5% since the February 15 low.   The MSCI Emerging Market equity index's 2.4% gain lifts the benchmark to new highs since early December.   The recovery off the January low is nearly 18.25%. 

European equities are mostly higher, but the buying is less enthusiastic.  Most markets are posting small gains.  The Dow Jones Stoxx 600 is up fractionally.  The rally in the energy, materials and utilities is offsetting the decline in health care, consumer staples, information technology and financials. 

Commodities are broadly higher.  Oil, copper, and zinc are up in excess of two percent.  News that the US oil build was the smallest in five weeks, coupled with indications that an OPEC/non-OPEC meeting will take place in the middle of next month and the weaker dollar are unpinning oil prices.   The ceiling on the May light sweet crude just above $40 has been convincingly breached and it is propelled to $41.  The immediate target is in the $41.50 area and then $43.  

The markets have mostly responded to what is generally seen as a dovish Fed statement and forward guidance.  That said, the market is even more dovish.   Four things stand out to us.  First, Fed officials need to see greater evidence of the US economy's resilience to the global economic and financial developments.  Second,  Fed officials are concerned that the recent acceleration of inflation is temporary.  

 Third, its general assessment of the US economy is little since December, but its confidence around appears to have weakened.   Fourth, the combination of shaving the growth forecast and lowering the unemployment estimate, Fed officials appear to be resigning themselves to weaker productivity and growth for longer.  This is also partly reflected in the projection of a lower terminal rate for Fed funds (3.25% from 3.5%).    It would not be surprising to see this shaved further in the quarters ahead. 

Two other central bank meet.  The Swiss National Bank did not change its stance.  It reiterated that the franc is overvalued and that it stands ready to intervene if necessary.   The euro is firm against the franc, though within the ranges seen at the end of last week.   

Norway's Norges Bank delivered the widely anticipated 25 bp rate cut, and the krone rallied.  The euro spiked to almost NOK9.37 from NOK9.48 before the announcement.  The central bank clearly signaled scope for another rate cut and refused to rule out a move to negative rates if the economy is hit with a new shock.   The central bank has been easing policy since the end of 2014.  The government is also pushing on the fiscal lever as well.  It has cut taxes and boosted spending, which has been partially financed by drawing from its sovereign wealth fund. 

The krone is the second-best performing major currency today with its 1% gain against the greenback.  The New Zealand dollar is up 1.35% on the risk-on move and news that the economy is expanded by 0.9% in Q4 15, better than the 0.6% expected.  The Australian dollar has been helped by a nearly 16k increase in full-time jobs as the labor market improvement continues.  The Aussie is up 1%.  It punched through $0.7600 to reach its best level since last July.  It has stalled near $0.7650, which corresponds to a retracement objective of the drop from last May's high near $0.8165. 

Sterling is the weakest of the majors, gaining about 0.3% against the dollar.  Osborne's budget has been meeting with some skepticism.  Self-imposed rules were gamed.   Brexit fears continue to run high.  Sterling remains well below last week's high near $1.4440.  The BOE will not alter policy, and the inflation report is unlikely to outweigh the other market drivers today. 

The euro has met the $1.1300 objective of the head and shoulders pattern.  The momentum warns that the euro can test last month's high near $1.1375.

Japan reported a smaller than expected trade surplus in February.  The JPY242.8 bln surplus was a little more than half of what the market expected, but it still showed improvement, as it always does (since early the 1970s without fail) over January.  Exports were weaker than expected while imports did not contract as much as forecast.  The yen, however, is taking its cue, it appears from the drop in US yields and the generally weaker US dollar.  The dollar is approaching key support near JPY111.00, which caught the double lows from February.    A break could see stops triggered, and the move accelerate. 

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