Central Banks continue to call the shots. If it’s not RBA talk or ECB standing aside, it’s a few nervous and candid Fed members that have upped the stakes in intraday volatility and volume. Speculators and investors don’t care whom or why just as long as there is currency movement – it provides opportunity. The powerful painkillers that Central Bankers have been distributing are beginning to wear off and its because of this why investors will have to embrace more volatility ahead. Equities, bonds and currencies have experienced a rough ride over the past few weeks. Like an addict, investors are suffering withdrawal symptoms, as QE no longer is numbing all the pain. Historically, the possibility of a new rate cycle is always a source of volatility and this one will not be an exception. Because asset classes have been so overinflated for so long, investors should be expecting the asset price moves to continue to be aggressive.
Patience and discipline a must
We know a tighter monetary policy is going to happen, it’s just the ‘when’ part everyone is trying to gage. The prodding and poking by the market certainly makes things very interesting. The bigger FX picture is clearer to many, but it’s the intraday moves that will hurt a few and the reason why both patience and discipline becomes even more important.
Yesterday’s FOMC minutes certainly provided a stinger for the weaker U.S dollar ‘long’ positions. Wednesday’s minutes revealed that several Fed officials are worried that disappointing growth around the world – Europe is on the cusp of its third recession in as many years – and a strong dollar could very much impact U.S exports (so far the bulk of the growth has been driven by internal consumer demand). These very thoughts have the market reassessing the precise timing of the Fed’s first-rate hike, with expectations now being pushed further into the future. So far in overnight action, the EUR has managed to rise a fourth consecutive day and has already printed a new two-week high at €1.2790, while USD/JPY is again probing new three-week lows under ¥107.75. Even a number of European 10-year yields have managed to print record lows yields in this morning session (Spain, Belgium, Finland and France).
Risk appetite rising
So far, yesterday’s perceived dovish FOMC minutes continue to aid risk appetite this morning, with the USD maintaining it’s soft tone, bond yields falling and equities rallying. The fact that Fed members are concerned about overseas growth and a strong USD (first time that the Fed has referenced its currency in this cycle) is leading the USD corrective rebound. The ‘dovish’ tone has triggered profit taking on USD longs, and the immediate risk is for a further squeeze higher in EUR’s (techies utopia levels are €1.2950-1.3000), GBP (£1.6200) and lower in USD/JPY (¥106.20). Because the overall trend for the USD remains intact, this move will again provide an opportunity to own U.S dollar at even better levels. Scenarios like this will always require patience. The sheer size of positions alone will continue to put pressure on the market. The possibility of rate divergence has led to record long USD positions being entered into across the board, and because of a yesterday’s bit of uncertainty will lead to further recalibration by most investors.
BoE offers little
The BoE MPC meeting this morning is not expected to offer up too much excitement – Governor Carney would prefer to leave that to the ECB and the Fed’s for now. Both rates and QE are likely to be left on hold. The interesting part is the markets reassessment on BoE timing of its first hike. For so long, the BoE has been the frontrunner amongst the G10 Central Banks to tighten monetary policy. Nevertheless, over the past month the market seems to be shifting its view on the BoE tightening cycle, with the first rate hike being pushed out the curve next year (to August) and then followed with a shallow tightening cycle. Will the market get some clarity this morning? Expect the usual disclaimers – there are a lot of risks for markets to think when considering global growth.
U.S weekly claims in focus
Stateside will be focusing on weekly claims this morning. They are expected to hold steady (+290k from +287k), backed by the recent JOLTS survey (one of the Fed’s go to benchmarks). Nevertheless, claims alone will not be enough to sway the Fed, but an accumulation of a number of job surveys will eventually convince U.S policy members that labor “slack” is coming down quickly. However, the big market caution comes from wages – the rise in wage growth has been stuck just above the U.S’s inflation rate and the Fed requires a higher growth rate before considering a shift in policy.
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