Dollar Bounce Survives Weak GDP Print

Daily Analysis - 30/03/2015

The Reversal Higher in the US Dollar Comes in Spite of Weaker Than Forecast US GDP

Fourth quarter US GDP grew less than forecast, highlighting the quagmire facing the Federal Reserve as it hints at higher interest rates in the second half of the year. Fed Chair Janet Yellen and Vice Chair Stanley Fischer have both independently confirmed the plan for hiking rates in 2015, but risks to the look are mounting as evidenced by slowing economic expansion.

Dollar Gains See Commodities Stumble

With the Federal Reserve confirming its outlook by maintaining it will remain “data dependent” and wait for inflation expectations to be firmly anchored before raising rates, weakening economic fundamentals are raising the stakes for the Central Bank. Poor fourth quarter GDP performance and mixed housing data failed to dent the rebound in the US dollar with strong employment data leading the charge. Equities were mostly unmoved by the worse than expected GDP numbers and revision lower in first quarter expectations, with the bigger move felt in precious metals and energy. Boosted by a weak dollar earlier in the week, gold fell below the key $1200 level while crude retreated back below $50 per barrel despite threats of a ground invasion of Yemen. So far, Saudi Arabia has stuck Houthi forces loyal to Iran with airstrikes in conjunction with Qatar, Bahrain, Kuwait, and the United Arab Emirates.

Oil Retreats as Iran Deadline Looms

The P5+1 nuclear negotiations with Iran are coming right up against tomorrow’s deadline for a framework agreement. At stake are Iran’s vast energy reserves which have been off-limits after several years of crippling economic sanctions. Unable to access the technologies vital to cost efficient extraction and difficulties exporting have hampered the Islamic Republic’s ability to sustain the economy. However, any deal could see a reversal in tides and a resumption of energy exports, further pressuring the energy market to the downside. Iran is expected to increase production in the event that sanctions are lifted. Coupled with the increased production from the United States and record additions to inventories, the risks for the energy market remain firmly predisposed to the downside. Oil prices faded after the initial shock of the Saudi bombing campaign wore off, further intensified by a strengthening dollar.

Greece Almost out of Money

News out over the weekend pointed to continued wrangling over Greece as Europe looks more poised than ever to let the country run out of cash and fail. Reform proposals presented over the weekend for a revised bailout failed to impress creditors, raising the stakes for today’s final submission. Greece is stuck in a difficult decision as it must find the funds to satisfy approaching repayment obligations. The remaining options to find cash include not paying public salaries and pensions, but this is likely to risk backlash from the populace already unhappy with the political u-turn made by the Syriza party. The Europe Commission might be attempting to extract every single concession possible by letting Greece edge towards the brink of failure, but this could equally backfire on the Euro Area as any failure is likely to hurt the credibility of the monetary union.

Gold Equidistant Channel Technical Pattern

In the wake of the shift in language from the Federal Reserve, gold moved substantially higher on the back of dollar weakness, although risks to the precious metal are currently biased to the downside. However, the reversal in the dollar late last week saw gold retreat from its exuberance. Improved upside momentum in the dollar coupled with the weakness in US inflation have further diminished the case for holding gold in the short-term as the prevailing longer-term downtrend remains intact. The downward trending equidistant channel has a bearish bias, with optimal positioning following the current trend lower. Short positions initiated at the top of the channel should be closed at the bottom of the channel. Fighting the trend is not suggested due to worsening risk-reward characteristics.