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Today's commentary is by Chris Gaffney, CFA and Vice President of World Markets at EverBank, the only U.S. bank we know of that offers investments in multiple currencies.
Good Day Currency Traders!
Let me turn the floor over to colleague, Chuck Butler for just a moment...
"Well, the Fed did cut 25 basis points to 2% on Wednesday, just as I thought they would. And they tried a backdoor curve ball to wiggle out of a basses-loaded jam. You see, the Fed had loaded the bases with rate cuts. And the markets were at bat, looking for the Fed to pull a Roberto Duran and say "no mas" with the rate cuts.
The Fed decided to leave out some language that had the markets thinking they figured out the Fed. But in reality they know nothing more than they did earlier in the day! You see...in their statements, the Fed removed the "downside risks to growth" clause as well as the statement that, "the committee will act in a timely manner as needed to promote economic growth and price stability."
The Pandora's Box is Still Cracked Open
Okay, from the outside, that looks like a wink and nod from the Fed. It's their way of saying they're done cutting rates. But, I don't think they are. And you know what? I don't think everyone else will buy it either, once it sinks in to some of the hard heads on Wall Street.
The currency participants didn't go for the backdoor curve ball and they took the hammer away from the dollar. But it wasn't a huge swing back in the dollar's favor either.
I explained yesterday that the Fed wouldn't come right out and say "no mas." If they did promise for "no more rate cuts," they'd have egg all over their collective face when the jobs report for April prints on Friday. And the Fed didn't. They removed some language, but left Pandora's Box of interest rate cuts cracked open.
A couple of months ago, I told you that I believed the Fed would cut rates down to 1.50% before stopping. They are now at 2%. And I'm not backing off that statement!
Oh, and before I go and hand this back to Chris, I wanted to touch on the GDP preliminary printing for the 1st quarter yesterday. The preliminary GDP numbers came in at .6%. And of course, the media jumped all over this; they couldn't stop saying, "See we averted a recession!"
Yeah, right. Without a good dose of government spending, and a swing in inventories, GDP would have been negative. Not to mention, household spending grew at the slowest pace since our last recession of 2001.
So, hey! You dollar bulls, keep propping up those dollars. Keep believing there's no risk in the economy or markets these days. Whatever makes you happy.
Back to You Chris...
Thanks to Chuck for making my job a whole lot easier this morning! So with the Fed cut 'in the bag,' and no clear sign from them that this is the last of the rate cuts, the dollar held its ground.
Overnight, apparently Asian traders decided the recent dollar rally was a bit overdone. They knocked the dollar back down, and shoved the dollar index below 72.50. That's exactly where it was trading at the beginning of the week.
But then Europe turned it back around again, and rallied the dollar back to where it was trading right after the FOMC announcement.
As Chuck suggested, the language of the FOMC statement isn't clear, so everyone is trying to put their own spin on it. There are several stories out this morning which suggest we have avoided recession and are starting to move forward again. Meanwhile others suggest we have several more quarters of negative growth ahead of us before we see a turnaround.
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