Sometimes, markets are not about what actually happened at a key-event risk, but about the broader picture. The event risk is a major distraction that merely serves as a “dam” that builds up pent-up energy, only to be released in the wake of the event risk, almost regardless of what actually happened at that event.
FOMC – what was the reaction all about?
I think that is the model we should use, in any case, when observing what happened after yesterday’s Federal Open Market Committee meeting, which provided little new information or guidance from the Fed.
The policy statement itself was extremely boring and hardly contained anything of note, save for Richard Fisher of the Dallas Fed branch joining Charles Plosser in dissenting from the statement.
Otherwise, all of the attention was on the FOMC “dot plot”, which did show a slightly steeper median tendency to Fed policy forecasts, and broad agreement that by the end of 2017, the Fed funds rates would be in a 3.5-4.0% range..
We all know how good the Fed’s long-range forecasts on the economy and (tongue firmly in cheek….). By 2017, I suspect we are either at QE4 or at 6%+ policy rates with raging inflation worries.
Yellen offloads
The Fed's chair, Janet Yellen, once again offloaded responsibility for the course of Fed policy onto the strength of incoming data, both enhancing uncertainty and underlining how important each data release will be over the course of the next few months.
As for the reaction pattern, it’s not surprising to see that USDJPY led the charge higher as risk appetite managed to keep an even keel while the entire US yield curve achieved a bit of “lift-off” in the wake of the meeting.
The reaction at the front end of the yield curve was far more modest than the reaction in FX, so some may argue that FX is “over-reacting”, but I would argue that FX is merely playing on the relative monetary policy themes (The Fed is tightening while ECB loosening and BoJ possibly opening up for new policy move, or even more interesting, Japanese government possibly warming up for a fiscal stimulus that is not debt-financed – how is that for inflationary policy? Also – China is also shifting into an easing on growth worries).
In that light, the USD move is justified, but we’ll need to see a continued ratcheting higher in US rate expectations and strong US data to justify where we are.
Looking ahead
As always after a big reaction to a key event risk, we should be on the look-out for reversal risks even if the default view is that the USD will remain strong here for another leg higher. So if the USD trades sharply weaker today, we’d be at risk for entirely reversing a considerable portion of the recent rally.
Levels to watch out for include perhaps 1.2925 in EURUSD, 0.9000 in AUDUSD, and perhaps 108.00 in USDJPY.
Elsewhere, there’s plenty more on the barbie today and tonight, including:
Swiss National Bank: Governor Thomas Jordan will likely need to make prominent mention of the intent to actually move into punitive rates on sight deposits if he thinks the EURCHF floor is under pressure and if he wants the pressure to steer further away from the 1.2000 floor.
A negative outlook for the Swiss economy and worries about a weak core EU would help to underline his point, and the market environment is wind at the SNB’s back if they do wax dovish – looking for EURCHF to potentially rally sharply in the wake of this meeting, but recognising the tremendous volatility risk if we fail to see the right signals. USDCHF and GBPCHF are also to consider for CHF downside trades if Jordan is able to impress the market on the dovish side.
Chart: EURCHFEURCHF could pop well back into the higher range toward 1.2200+ today if the SNB’s Jordan impresses sufficiently with dovish intentions and downgrades to Swiss growth and even inflation projections. Beware the risk of a fat tail and the peg suddenly coming under pressure if the SNB fails to deliver the "needed" message today.
Norges Bank: The wily Norges Bank is a loose cannon that can come out suddenly dovish or hawkish without much warning. They may err to the cautious side on new signals today after a couple of very loud pivots earlier this year that had NOK swinging wildly weaker and then stronger. Note that EURNOK is mid-range and near the 200-day moving average.
If governor Oystein Olsen expresses significant concerns on the growth front, driven by mounting worries about oil sector investment and perhaps a post-housing bubble confidence problems among consumers, NOK could head for another leg weaker.
ECB T-LTRO allotment announcement: this could be an important one, though I’m not sure if the market will react immediately on this announcement – a weak take-up could accelerate a move to new policy, while a strong take-up expands the ECB’s balance sheet.
Scottish independence referendum: market is getting increasingly aggressive in the belief that we see a No vote tonight/overnight. I tend to agree, but wonder how much upside this will mean for the pound from here.
My best guess is “some”, but not a wild rally and maybe no upside versus the USD if it remains strong elsewhere. I would focus on GBPJPY and EURGBP as the pairs of interest if we see a resounding No vote. GBPJPY has exploded to new multi-year highs, while EURGBP is tickling the cycle lows below 0.7900.
Be aware that there is a unsettling degree of uncertainty on the quality of the polls surrounding this event and that a Yes vote shock, while unlikely, is possible and could mean discontinuous moves in the market and volatility of several multiples of the norm.
I’m not 100% sure of the timing for the referendum voting results, but my understanding is that the results will be trickling in over the course of the early morning hours, with the most populous regions not reporting until tomorrow morning, UK time. The polls close at 10:00 p.m. UK time this evening.
Economic data highlights
- US Fed FOMC meeting: asset purchases tapered -10B as expected to 15B/month rate as expected
- New Zealand Q2 GDP out at +0.7% QoQ and +3.9% YoY vs. +0.6%/+3.8% expected, respectively and vs. +3.8% YoY
- Japan Aug. Adjusted Trade Balance out at -¥924B vs. -¥985B expected and -¥1022B in Jul.
- Upcoming Economic Calendar Highlights (all times GMT)
- Switzerland SNB 3-month Libor Target announcement (0730)
- Norway Deposit Rates (0800)
- UK Aug. Retail Sales (0830)
- Eurozone ECB TLTRO allotment (0915)
- UK Sep. CBI Trends in Total Orders/Selling Prices (1000)
- US Weekly Initial Jobless Claims (1230)
- US Aug. Housing Starts and Building Permits (1230)
- US Sep. Philadelphia Fed Survey (1400)
- US Fed’s Fisher to Speak (2100)
- New Zealand Sep. ANZ Consumer Confidence (0100)