The bulls and bears have all got a whipping of similar magnitude in a brutal week for asset price movement. A week where both the shorts and longs have at one time managed to be squeezed, ending the jobbing opportunities of a few unnerved speculators as many try to second guess the Fed’s next move. So far, the accumulating price action is ending the week with global bourses on a firmer footing, and a dollar looking for air, as the market adjusts their remaining positions ahead of Helicopter’s Ben’s testimony and the FOMC meeting next week.
Global investors seem to be taking comfort from a couple of Fed watcher reports out yesterday – like the Wall Street Journal’s Fed watcher Hilsenrath’s piece. The articles suggest that any bond tapering would be gradual in nature. Did we really believe that a central banker, who has been providing “free” money, and promoting artificial wealth via an exuberant equity market, was going to turn off the taps immediately? Where is the rational in that? In the end, the irrational investor has to be tamed by the obvious delivered by the least obvious of sources.
Hilsenrath suggests that the Fed has told investors not to “fret about tapering” and that the market reaction to higher rates is “exactly what the Fed does not want.” It’s little surprise that the market has been trying to price the overshoot out. Investors should probably be expecting Bernanke and his fellow cohorts to tow the party line, and emphasize the separation between QE and rate hikes until the ‘irrational’ investor becomes less so – the theme for next week.
Is the fourth straight bull week on deck? With so many players now taking to the sidelines after this week’s horrid price action, less liquidity has been trying to find the top to the EUR’s most recent move. The market has been playing the percentages ahead of not so insignificant Euro data this morning. Investors have already been selling the 17-member strong currency in front of some decent offer coverage just inside the psychological 1.3400 area. It’s not just a fancied option strike price, but also a significant region of offers ahead of some large stop losses. With the FOMC up next, the markets are likely to be sensitive to any data prints that could “tilt expectations with regards to asset purchase tapering.” Watch out for this morning’s US industrial production and consumer sentiment print. Both are anticipated to error on the softer side, which may influence the “mighty” dollar to tread even softer.
Not much of a surprise in the Euro employment story line this morning. Data shows that there was a sharp fall in number of people in work in the region in Q1 (-0.5%, q/q), leaving employment at its lowest level in seven-years. This certainly supports the longer-term problems of the Euro-zones debt crisis and is expected to be a dampener on the market’s recent optimism. The decline has officially left +145.1-million people employed. Higher unemployment or underemployment will limit consumer demand and support the vicious circle of “lack of growth” – which is obviously no good collectively or individually on economies like Germany. The hardest hit regions remain the most obvious – Greece (-2.3%, q/q), Portugal (-2.2%) and Spain (-1%).
Other Euro data confirms that the Euro-zones core inflation poses no threat and is not an obstacle to further stimulus from Draghi and company. The core reading came in at +1.3% vs. expectations for a +1.2% print. Even the headline was unchanged and inline with expectations at +1.4%.
Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX