US Dollar Plummets with Treasury Yields as Fed Announces Quantitative Easing Measures

The Federal Reserve was easily the biggest source of volatility on Wednesday, and it wasn’t due to their rate decision. Indeed, the Federal Open Market Committee (FOMC) left their fed funds target range at 0.0 percent - 0.25 percent, as expected. What was somewhat unexpected, though, was the FOMC’s announcement that they would buy up to $300 billion worth of longer-term Treasury securities over the next six months in order to help improve conditions in private credit markets. While the FOMC has given clues in the past that they were considering such measures, the actual announcement sent demand for Treasuries skyrocketing and yields on 10-year Treasury notes down 50 basis points to 2.505 percent, while the US dollar fell sharply across the majors and the DJIA and S&P 500 surged. The FOMC also said that they would buy up to an additional $750 billion of agency mortgage-backed securities and increase purchases of agency debt by up to $100 billion. The extent of the US dollar’s drop leaves the door open for at least a brief correction higher over the next 24 hours, but with the DXY index extending its break below a key multi-month trendline, medium-term risks remain in favor of further declines for the currency.

Euro, British Pound End Day Higher Thanks to Sharp US Dollar Declines

The euro has gradually been gaining strength since the start of the month, but the British pound came under significant pressure on Wednesday morning following a round of disappointing UK news. First, data showed that the UK economy hemorrhaged jobs during the month of February as jobless claims surged by 138.4K, the largest single month gain since record-keeping began in 1971, which pushed the claimant count rate up to 4.3 percent from 3.9 percent. This clearly doesn’t bode well for domestic demand in the UK, but highlights why the minutes from the Bank of England’s meeting in March were so bearish. Indeed, during the March meeting, the BOE’s Monetary Policy Committee not only voted unanimously to cut the Bank Rate by 50 basis points to 0.50 percent, but also voted unanimously to pursue quantitative easing. Nevertheless, small moves on the part of EUR/USD and GBP/USD in the morning turned into massive gains later in the day due to the Federal Reserve’s announcement for its own quantitative easing plans, which adds to upside potential for both currency pairs.

Canadian Dollar: USD/CAD Likely to See Volatility on Release of Canadian CPI Figures

The Canadian dollar was generally weak against most of the majors, but the currency was able to make headway versus the US dollar as USD/CAD broke below key trendline support. The move could continue on Thursday as the 7:00 ET release of CPI for February is anticipated to rise after contracting for the fourth straight month in January by 0.3 percent. Indeed, CPI is expected to rise 0.3 percent, but the annualized pace is forecasted to slip to a more than 2-year low of 1.0 percent. Meanwhile, the Bank of Canada’s core CPI measure may fall down to a 7-month low of 1.5 percent from 1.9 percent. Given the sharp drop in commodity prices since the summer and slowing in the Canadian economy, there is potential for weaker-than-expected readings and thus, the Canadian dollar could pull back further. However, if the annualized CPI measures actually hold steady or rise, the currency could surge.

Japanese Yen Shows Little Reaction to Bank of Japan Rate Decision, Monthly Report

The Japanese yen ended Wednesday on a mixed note, gaining against the ultra-weak US dollar, British pound, Canadian dollar, and Australian dollar but falling versus the New Zealand dollar, Swiss franc, and euro. However, most of the moves were insignificant compared the US dollar’s declines, indicating that the Bank of Japan’s latest policy meeting really had no impact on the markets. As expected, the BOJ left rates unchanged at 0.10 percent, but the central bank’s economic outlook turned increasingly bearish. Furthermore, the BOJ announced that they would increase their outright purchases of JGBs by 4.8 trillion yen to 21.6 trillion yen per year, effective this month. Ultimately, this indicates that broad interest rates in the Japanese economy should continue to fall lower, which the BOJ hopes will improve money market operations.

Terri Belkas is a Currency Strategist at FXCM.