Ridge Capital Markets believes that this is the day that will greatly shape financial markets for the next weeks – and, possibly, months. The Federal Reserve has been in a meeting since yesterday and is expected to announce today its stance on interest rates and monetary policy in general.
The Bank of Japan left its negative interest rates unchanged, in what is strangely seen as hawkish, just because it hasn’t driven its rates into further negative values (yet). The JPY was essentially unchanged against the USD, precisely because today the next direction that the USD will take will be defined and will in turn define the JPY’s direction.
We think that the most recent economic US data is supportive of another rate hike. Also, interestingly enough, by rallying above its pre-Draghi position, the relatively strong EUR is creating what may seem as a safety net for a USD rally, in case Yellen does come out with a hawkish tone. Plus, while now fading, the higher prices generated by the oil short squeeze have also created a friendly environment to host a Fed-induced USD rally.
Sure, we also need to consider that the US retail sales and CPI data are also to be released on these days, and it must be acknowledged that they will also affect market sentiment. However, the truth is that all eyes are on the Fed and that the forex markets are sure to react heavily, in any direction, to what will be announced today by Janet Yellen. So, let’s look at the investment opportunities that we believe are playing out.
In our view, for the reasons outlined above, it is likely that the Fed will come out with a hawkish tone, suggesting that a new rate hike is coming very soon. That being the case, if the Fed stands by a coming new rate hike, while the ECB and BOJ dive further into or stay swimming in the negative rate ocean, there are sound reasons to believe that the USD will stage a strong rally against the EUR and the JPY. So, a long USD/EUR or USD/JPY position seems a profitable move – while still relatively risky, considering how volatile and unpredictable markets have been.
In the same way, should the Fed make this announcement, the GBP, AUD and CAD are also likely to feel the strength of the USD, making a strong recovery in the USD/GBP, USD/AUD and USD/CAD currency pairs from the recent weakness.
It should be said that the CAD has been performing quite strongly, and that the Bank of Canada has lately been more conservative than the ECB or the BOJ. Still, the CAD is likely to be impacted by a strong USD and by the likely continued fall of oil.
As for the AUD, it is highly a commodity currency that is strongly impacted by the China story – which looks fuzzy and likely to go on negatively affecting the Chinese demand for Australia’s commodities. Iron ore is falling down from its recent short-term strength, and the recent decision by the New Zealand Central Bank of sending its rates down is also likely to drive Australia’s Central Bank to take the same route. So, the USD/AUD is likely on its way to be a winning trade.
Today is the day that will determine if those betting on the USD will be happy – while the market breaks into red and the forex markets are shocked by the USD bullish trends. Could it be that the USD bulls are the unhappy ones and the market will see green instead? Look at the technicals, consider the fundamentals, and trade accordingly.