About that interest rate hike and 3 DXY levels you must watch
For those of you who have some time to waste, here is full speech of Yellen to the Economic Club of New York yesterday in it’s grand verbosity. As my Secondary 2 English teacher used to say, verbose equals verbal diarrhea (I kid you not). When one cannot deliver a clear YES/NO message, one attempts to drown the listener in shit. To put it kindly, when one cannot convince, one chooses to confuse, confound.
“Blah blah blah we MAY or MAY NOT raise interests.”
In my humble opinion, the Fed will not raise rates for economic reasons. If it raises rates ever, it is purely for political reasons. It’s all about CREDIBILITY. Besides, if the Fed raises, how is the United States of America going to pay all that sovereign debt let alone service interest?
3 DXY levels that are significant
Since the Fed cannot raise rates or can only raise token just so to show they can do it, the USD is going to weaken at some point in time. Here are DXY levels to watch.
- Fed starts suggesting rate hikes in 2014 causing DXY to reverse, rally.
- At the most anticipated FOMC meeting i.e. March 2015, Fed disappoints, leading to a 400 pip rally in EURUSD.
- The good thing that came out of March 2015 was it set a level for DXY i.e. 100.39. This level is now what I call ‘peak rate hike expectation‘. If the market had expected the Fed to hike more, the market would be at 100 or even more.
- Subsequent disappointments in June and September set the opposite ‘peak rate hike disappointment‘ at 92.62. In my opinion, the moment a rate hike is totally off the table, DXY will crash below this level.
- If you agree entirely with this analysis, here’s an important thing to note – the Fed hiked in December and promised to do more this year but DXY never lifted beyond 100.39. This is very telling. It means not for a moment did the market expect any more hikes.
There that’s it – the US Federal Reserve for all its hemming and hawing are not going to hike and the market knows. It is just a matter of time before the market drops any courtesy and pretence to fall out of this 92.62 – 100.39 range in place since 2015.
Before I end, there is another level to look for tomorrow which is the last day of March. 94.81 is the worst month end close of DXY. The index is perched on this level and tiny level as it is, there will be like-minded people who believe like me it’s huge significance.