Week in FX – Patient Fed Soothes Jittery Markets

Capital markets are poised to fall silent as the holidays are about to begin in earnest. It’s in hot pursuit of the broad-based risk-on rally that has given U.S. equities their biggest two-day gain of the year. It’s a nice holiday gift to close out the trading season – heartfelt thanks to Federal Reserve Chair Janet Yellen and her fellow policy members at the Fed.

Last Wednesday, U.S. policymakers did not change much terminology in their last statement of the year. But slight changes in language have led some investors to judge that the Fed is preparing for the first interest-rate hike next year, and is holding steady on that course for the time being. Though the Fed’s message this time out was a tad clumsy, it essentially soothed market fears with one word: patience.

Fed Message Prints Profits

The Fed’s maintenance message has provided support for global bourses, the dollar, and risk. Even the recently oversold high-beta commodity sectors have managed to find their “sea legs.” The commodity-sensitive economies of Australia and Canada have witnessed some strong investor support, backed by sharp gains in energy (Brent $60.04) and metals (gold $1,199.50). Similarly, the yen bear has been doing their bit for regional equities. USD/JPY is closing out the week, straddling a new weekly high (¥119.40), which allows the Nikkei 225 to build on its gains. Even suspect China with its Shanghai Composite has managed to pull off a new four-year record high in its final hour of trading earlier this morning.

No Reaction to the BoJ’s Status Quo

The final event risk was to come from the Bank of Japan (BoJ), but it seems to have petered out rather quickly. As expected, the BoJ decided to maintain the easing policy adopted in late October by an 8-1-majority vote. The surprise came in the assessments.

Despite the recent disappointment in the country’s gross domestic product figures, Governor Haruhiko Kuroda and his team actually raised their assessment on industrial output, exports, and housing investment.

There Is a Light That Never Goes Out

The BoJ reiterated that their economy continues to recover moderately as a trend, but also added the “decline in demand following front-loaded increase before tax hike is waning as a whole.” A weaker yen seems to be working, and the BoJ also commented on exports showing signs of picking up, while Japanese housing investment and industrial output problems seem to be “bottoming out.” On inflation, the BoJ reiterated that consumer-price index expectations for the near-term remain around +1%. Japan’s Finance Minister, Taro Aso, noting that his country is continuing its gradual recovery has backed this. Separately, a Nikkei report is speculating that Prime Minister Shinzo Abe’s fiscal stimulus package is to come in around +¥3.5T, well above the market’s initial estimate of +¥2-3T. If true, the next course of action would be a cabinet approval, whispered to be as early as December 27. Abe and his fellow cohorts are not expected to undertake any new debt issuance to fund the stimulus package.

What’s On Tap for Next Week

A Federal Open Market Committee meet, a Swiss National Bank surprise, a defiant Russia, and a placid BoJ will always be a hard week to follow no matter the time of year. However, despite next week’s festivities and scheduled bank holidays, it should have investors expecting a week of price action being dominated by lack of volume support. The month of December has been a good one for volatility, and a great month of market opportunity, especially if you had the appetite to trade risk. Nevertheless, for the majority, it has been a month of limiting the damage and syphoning off the remaining profits as we make a beeline for 2015.

Seasons Greetings and Happy New Year!

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