I’m not sure if there’s anything I can say that hasn’t already been said about this week's Fed meeting, but with the multitude of notes and conjectures floating around one thing that is abundantly clear, with regards to forwarding guidance, no one knows what to expect.
What we do know, however, is this meeting has lots of eyes on it and not just because it’s Jerome Powell’s first post FOMC press conference, but there’s likely to be some nuanced changes in the Fed statement.
Since the December meeting, inflation has shown signs of coming to life, although the latest round of data would challenge that view. But more significantly Fed speak has turned marginally more hawkish of late, suggesting we should expect some upgrade to the statement, at the minimum.
But during the period, the markets endured a colossal collapse in equity markets at the prospects of higher US interest rates, so the big question will be how does the Fed nudge rate hike expectations higher, without tipping the apple cart.
In typical fashion, however, traders are hedging for the possible extreme outcomes. While markets tend to ove-rhype these events, this time around the air is so thick with uncertainty, and the fear of the unknown is driving sentiment. But at the end of the day, will that extra dot, which is little more than a central bank projection, make that much of a difference in the global competition for investment dollars?
In general, much of the cross-asset price action was more a reflection of pre-FOMC positioning, as the markets reversed out Monday’s dollar weakness and the US equity markets are finding support on the back of the energy sector, in spite of Facebook's (NASDAQ:FB) continuing woes.
Oil Markets
In addition to the Middle East (geo) political issues and Venezuelan supply concerns, the American Petroleum Institute (API) report is providing a further fillip to oil prices. The API reported a surprise draw of 2.739 million barrels which is an enormous 5 million barrel disparity from analyst expectations. That’s a vast delta and should support a short-term bid on dip mentality despite the longer term bearish implication of rising US shale production.
However, traders are looking over their shoulders at the worrying signs from the industrial commodity complex which is plunging on a waning global growth narrative, something that certainly doesn’t bode well for oil producers either.
Gold Markets
Gold markets reversed out Monday’s gains as the US dollar picked up steam ahead of Fed rate decision. While higher interest rates typically weigh on gold sentiment, I’m struggling to factor in just how much competition the possible one extra dot plot will have for Gold demand. Tail risk demand in the face of gusting headwinds from risk-appetite, heightened (geo) political tensions, inflation concerns, trade wars not to mention the runaway budget deficit spending which should serve to counteract the well-expected FOMC rate hike should keep the floor on gold prices intact.
Currency Markets
The markets should tie a string around their finger to remind themselves it’s not uncommon for the dollar to recover from bearish extremes ahead of an FOMC meeting.
The Euro
The markets went dollar bid across the board after the latest Germany ZEW survey results came in worse than expected, which reversed out much of the ECB inspired euro rally and more from the previous day. The obvious implications are the ZEW reading is implying the stronger EUR is weighing on Germany’ s economy and by extension, the ECB will remain dovish.
The Japanese Yen
Little more than waiting and watching but some mild intrigue overnight after BOJ’S "AMAMIYA: DON’T RULE OUT ADJUSTING RATES BEFORE HITTING 2%” (Bloomberg)" inspired a brief spike lower but reversed out just as quickly.
While trader remains nervous about a pre-FOMC squeeze higher, provided there’s not an out of the box response from Jerome Powell, the market will likely initially fade any interest rate inspired move higher, as that strategy has served traders through a multitude of risk events this year.
The Malaysian Ringgit
Local ringgit traders and investors are so preoccupied with FOMC’s forward guidance and Fed fund rates dot-plot projection that MYR demand has dwindled. A steeper rate hike trajectory is keeping regional markets apprehensive, and when you factor in the adverse domestic equity price action of late, the MYR continues to struggle short-term. But for the ringgit, we are miles away from a crossroads in sentiment as even in the face of a one-dot increase in the Fed projections the current account driven MYR should remain in favor regionally.