Draining the Punch Bowl

Draining the Punch Bowl

The markets continue to digest the latest signals from the Federal Reserve Board who are now actively discussing how and when to pare back the balance sheet. But just as significantly  investors are now coming to grips with the notion that the  perpetual global central bank gravy train may be coming to an end in the wake of policy pivots from both the BoC and BoE and the overly  hawkish musings from the Federal Reserve Board

The Central Bank’s  money printing machines and bloated balance sheet have not had the inflationary effects anticipated, and perhaps it’s time to err on the side of caution as concerns over possible financial market distortions driven by easy money policy come to the fore. Market distortions ultimately lead to market failures, so perhaps the Federal Reserves and other global CB’s   are growing concerned with investors hubris and signalling it’s time to reign in risk.

Not too unexpectedly in the wake of the surprising policy pivots from BoC and BoE,  the market is now wondering which central bank will be next to drain the punch bowl. BoJ??

Japanese Yen

Very aggressive dollar buying across all three sessions yesterday has propelled  USDJPY above the 111 level but it was the profusion of strong US economic data released yesterday, that corroborated the  Fed’s view and was the primary catalyst.  BoJ is not expected to shift policy today, so the markets will focus on whether the bank maintains its JPY 80 trn  QE backstop.

Euro

The markets remain in FOMC post-mortem as a dovish ECB and Hawkish Fed has Euro longs squirming but with few catalysts and little to glean from cross asset price action, buying EURUSD on dips gave way to paring back risk.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Senior Currency Trader and Analyst at OANDA
Stephen has over 25 years of experience in the financial markets and specializes in Asian currencies at OANDA. After having started his trading career with NatWest Bank, he is currently based in Singapore as a Senior Currency Trader and Analyst with OANDA, focusing on the movement of the Aussie Dollar and ASEAN Currencies. Stephen has an extensive trading experience in Interest Rate Futures, Money Markets and Precious Metals. Prior to joining OANDA, he worked with organizations like Cambridge Mercantile, Nat West, Garvin Guy Butler, Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes
Stephen Innes

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