Dollar Softer In Consolidation Mode

The US dollar is trading with a softer bias today after the momentum stalled yesterday. The pullback is shallow but could be extended a bit more in the North American session. The US reports weekly jobless claims, durable goods orders and pending home sales. However, the market already appeared to take on board that the US economy is rebounding strongly in Q2 and that the prospects of a Fed hike have increased, but a June/July hike is still not a done deal. The next important step regarding market psychology is not today’s data but tomorrow’s speech by Yellen. 

Recall in that in March several regional Fed presidents talked up the prospects of a rate hike as early as April. Yellen effectively closed the door on this line at her March speech in NY.  Dudley’s comments last week, after the FOMC minutes, likely reflected the views of the Fed’s leadership, and should be reiterated by the Chair.   

The interest rate adjustment has stalled alongside the greenback. The August Fed funds futures contract, which offers the clearest view of a June or July hike has stalled at an implied yield of 55 bp or about a 72% chance. As recently as May 16 the implied odds were closer to 20%. The US two-year premium over Germany widened from 125 bp after the US employment figures on May 6 to 143 bp yesterday.  

In addition to the dollar’s consolidation, the other feature continued recovery in oil prices.  Brent rose above $50 a barrel today, six-month high.    The driver is supply. The larger than expected draw down of US inventories, coupled with disruptions in Nigeria, Venezuela and Libya are taking a toll.   OPEC meets next week, but reports suggest attempts to freeze output have been largely abandoned. Although Iranian output is increasing, it will likely take several more months at least before pre-embargo levels are reached. Reports suggest the partial sanctions that have continued, the ease of alternative business, and a purposeful campaign by Saudi Arabia slow the Iran’s recovery.