The Fed has spoken. Or, to be accurate, the Fed has issued the anxiously awaited statement. It kept interest rates unchanged, mentioned a slight slower U.S. economy (but still data positive), and eliminated the dramatic references of March to the international risks, leaving the door open for a June rate hike.
While there is an interpretation for every taste, facts are facts, nevertheless. The U.S. central bank kept its rates in positive territory (unlike the ECB and the BOJ), and has taken a slightly hawkish tone suggesting that a June rate hike is in play.
In a typical kneejerk reaction, currency, commodity and stock markets reacted initially in a confused way – because the Fed’s statement had two possible interpretations. Still, at the end of the day, while oil has rallied to $45 (despite a previously announced DOE massive inventory build), Gold and silver went nowhere and the USD and the DXY were mostly unchanged.
The question, now, is what will the BOJ announce today? Kuroda had said that, depending on what the Fed would do on Wednesday, the BOJ could announce further easing on Thursday. Well, the Fed did not make a substantial move in any direction, which leaves the BOJ in the difficult position of finding a way to bringing the JPY down (it has been trading higher against the USD, in a counterintuitive trading pattern in response to the BOJ’s easing).
And now comes the complex part. What can traders make of all this? How can traders profitably navigate this market?
In our view, at Ridge Capital Markets we’ve been right about the solid case to keep building a long USD position. The Fed didn’t throw the USD under the bus, whereas the EUR was confirmed by the ECB last week as a currency that is aggressively targeted to go down, by any means necessary. The JPY, on the other hand, can’t simply stay in the 110 range for long. Otherwise, Japan tanks sooner rather than later. Sure, China wants the USD to stay where it is right now, but even China is likely to face a moment when a CNY devaluation is unavoidable, even if the USD bullish trend were to stay paused for some more time.
We believe that the Apple Inc (NASDAQ:AAPL) poor performance is a sign that things are about to turn very negative in stock markets, and that deteriorating global economic conditions will weigh on commodities and commodity currencies. In particular, we reiterate our belief that the unexplainable oil exuberance is about to meet the reality.
In this scenario, again we recommend traders to short either the EUR/USD or the AUD/USD currency pairs, given that the threat of deflation keeps weighing on the Euro Zone and on Australia – two places where further rate cuts are to be expected – in a policy divergence with the U.S., where what a rate hike is now a bit more expectable. So, for traders who are value-seekers, we believe these can be sensible and profitable moves.