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Yellen gives no hints in timing , USD weaker

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Despite Fed Chair Yellens slightly dovish testimony FX markets were broadly unchanged. EURUSD gained slightly to 1.1350 while GBPUSD rose to 1.5475. AUDUSD climbed to 0.7877 on the back of stronger China PMI manufacturing. NZDUSD firmed around 0.7530. Asia equity markets were broadly higher. The Nikkei rose 0.10%, Kospi up 0.8% while Shanghai was flat on return for the long holiday. US treasury yields were stable as the 10 yr lingered around 1.988%.

Fed Chair Yellen’s highly anticipated testimony indicated that policy decision would be data dependent and considered on a meeting by meeting basis. She did make is clear that no rate hike would be imminent, but the ground work was ready for tightening later this year. She told the Senate banking committee that the economic recovery was solid being led by the labor markets. In addition she hinted that wages should start to increase. In regards to inflation Yellen stressed it was too low for the feds liking however, weakness was due to softer oil prices and medium term inflation should rise to 2%. USD was only slightly weaker on the comments since there was really no new information above the recent FOMC meeting minutes.

Luc Luyet, CIIA – Senior Market Analyst: “Fed Chair Yellen’s testimony is likely to pave the way for a short-term decline in US dollar, as she signaled that any rate hike in the “next couple of meetings” is unlikely. However, she also hinted that patience has its limit, which calls for a start of the tightening cycle in the second half of 2015. Should the 6 March US payrolls show ongoing improvements, we suspect the Fed will drop its “patient” forward guidance in the March FOMC meeting, which would be another confirmation that the first rate hike is getting nearer and lead to renewed USD strength.”

The new Greek government submitted its proposal for economic reforms to extended it 172bn bailout for up to four month which was quickly approved by the Eurozone finance ministers. According to news reports two of the three member of the Trioka are already expressing doubt over the New Greek plan. A clear signal to Greek that its position in the EU is far from secure. In the statement by the Eurozone announcing the acceptance of the plan ministers suggested that it was a “valid starting point” for negotiations on the bailouts new terms. In addition they expected Athens to provide more details to the current plan in the weeks to come. EUR bas only slightly stronger on the news as the optimism around the extension has run out. The market is now pricing in a high probability that “Grexit” will become a reality. This plan only halts the inevitable.

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