Fed Comments Spark USD Rally, Knock Top Leader Out

The EUR/USD remains the pair of choice among the leaders in the currency trading portion of the contest, as profits on positions in the pair catapulted Friday’s second and third place contestants to the top 2 spots. Meanwhile, the contestant with the largest portfolio balance on Friday fell back to third place on Monday, as her attempts to short the US dollar and carry trades via USD/CHF and GBP/JPY went against her.

Indeed, the greenback rocketed across the board on Monday amidst hawkish commentary by Federal Reserve Chairman Ben Bernanke, New York Fed President Timothy Geithner, and Dallas Fed President Richard Fisher, which stoked speculation that mounting price pressures may actually lead the US central bank to consider raising the fed funds rate this year. While the Fed is highly unlikely to actually implement a rate hike, this sort of jawboning tends to be a very effective as a means of “verbal intervention” against the plunge in the US dollar. Furthermore, rising consumer prices are an issue globally, as even the Bank of Canada – which was expected to cut rates this morning – surprisingly left rates unchanged at 3.00% in light of rising inflation risks and an easing in “many” of the downside risks to growth. Given the dependence of the Canadian economy on US demand for exports, it appears that the Bank of Canada has become a bit more optimistic on the prospects for expansion in the US.

The contestant with the largest currency portfolio balance as of Monday’s close – which amounted to a whopping $237,186.57 – raked in his profits by closing out multiple long EUR/USD positions on Sunday evening as the pair tested 1.58. Contestant number 1 did this just in the nick of time, as the pair subsequently tumbled during the New York trading session given the above-mentioned US dollar strength. So is contestant number 1 a US dollar bull? Today he is. While he was closing out those long EUR/USD positions, he also entered a rather large long USD/JPY position near 105.30. Though he has not actively traded this pair in the contest before, he has traded another Japanese yen cross – GBP/JPY – so he is aware of the volatility associated with these crosses. Meanwhile, we’ve seen very little reaction in USD/JPY to this morning’s disappointing release of the US trade balance, which showed the deficit widening by 7.8% to $60.9 billion, despite a 3.3% rise in exports. The culprit? Oil. Imports jumped 4.5% - the biggest gain since November 2002 - to a record $216.4 billion as both the average price of imported petroleum and the total volume of fuel bought were at the highest levels ever. Instead, contestant number 1 may be watching the status of the stock markets more closely as the DJIA continues to consolidate last week’s massive losses. Nevertheless, volatility remains high, which makes this a very risky play.

Our second place contestant, who ended Monday with a portfolio balance of $209,972.35, is apparently trading on the news, as he entered a long EUR/USD position following the US trade numbers. Though contestant number 2 has generally done well by only traded EUR/USD since the start of the contest, he has recently had a few of his trades go against him which could lead his days in the top 3 to be numbered. Likewise, contestant number 3 ended Monday with a balance of $194,608.61. While extremely profitable GBP/JPY and USD/CHF positions earlier in the contest have kept her high on the leaderboard, she actually lost just over $22,000 on Monday as she closed out losing USD/CHF, GBP/JPY, and EUR/USD positions. Furthermore, at the time of writing, she has not entered any other positions, which leaves the door wide open for other traders to climb the ranks.

Congratulations to our top traders and good luck!

Terri Belkas, Currency Analyst of DailyFX.com