The picture across markets is mixed, to say the least, now that we’ve completed three trading days since last week’s shock Fed non-taper. Many markets, including some of the major equity markets, gold, and some of the commodity currencies, have fully reversed the reaction to the decision, while the US dollar more broadly speaking is still on its back foot, even if it has taken back some of the lost territory in many places.
I think the most telling reaction is in the broader risk-appetite measures like equities, which suggests that the market is unable to return to the typical reaction pattern we’ve seen over the last few years of the market celebrating each anticipated wave of Fed liquidity. The more consistent reaction has been in the bond market, as treasuries remain well supported after the Fed’s decision to continue purchases. All other factors being equal, this is somewhat JPY supportive, and it has been interesting to watch EURJPY dipping back to that key local support. This is a pair to watch in the coming sessions to see if the rally can stick or if we’ll see a biggish stop-loss driven reversal.
The 133.00/133.25 support now looks critical for EURJPY
The next acronym we’ll be tossing around: the FARP
One very interesting article out late yesterday from FTAlphaville discusses a possible major reason why the FOMC decided not to taper last week, as it has stealthily rolled out a facility (FRFARRP, if you can believe it) to address collateral (treasury) shortages in the repo market that were causing significant unintended market disruption. I remember the mention of the Fed looking at some kind of facility in one of the recent Federal Open Market Committee (FOMC) minutes, and this is it and could have very widespread implications, as the FT article discusses, including the possibility that it worsens the “paradox of thrift”.
“At best, this is a policy that overcomes the collateral ‘crowding out’ effect amongst savers and stops liquidity seeking refuge in alternatives to risk-based markets…”
“At worst, however, it extends the Fed’s “put” to the realm of saving institutions. The Fed begins to underwrite not just the debtors’ market and mortgages and banking loans, but the savers’ market directly. This threatens the world with exposure to the negative effects of the so-called paradox of thrift as well as the potential long-term addiction of savers to central bank deposit facilities.”
FTAlphaville was certainly Johnny-on-the-Spot yesterday with three articles about this facility, including this helpful one. Required reading.
Elsewhere…
European Central Bank president Mario Draghi bandied about the idea that the ECB could do another long-term refinancing operation (LTRO). This caused a brief bout of euro selling yesterday, but at the same time, Draghi suggested that banks are less dependent on the ECB for now, so one wonders what the demand would be in the event an LTRO is launched. In policy terms, LTROs are a local anaesthetic, while quantitative easing is morphine, one might say…
Dallas Fed president Richard Fisher lambasted the White House for a botched job on the Fed chairman nomination and said that “Yellen is a seriously wonderful woman, but she’s dead wrong on policy”. Youch! You have to like anyone in the public sector that is willing to be so frank, regardless of their views.
Looking ahead
Watch out for the German IFO today and a gaggle of Bank of England and other central bank officials speaking. USDCAD is one of the top turnaround candidates, in my book, if 1.0250 or so offers support and we have a Canadian Retail Sales data point up later today.
Note that EURCHF closed below the 200-day moving average for the first time in about a year, though the flat-line support is still in place around 1.2260.
The USD selling momentum has faded, but the greenback hasn't exactly been shooting the lights out. Reversal risks have risen wth the erasure of the post-FOMC reaction, but we need to see EURUSD punching well back through 1.3450 and AUDUSD down through 0.9350, for example, to make a bigger impression.
Stay careful out there.
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Riksbank’s Jansson to Speak (07:10)
- Poland Aug. Unemployment Rate and Retail Sales (08:00)
- Germany Sep. IFO Business Climate Survey (08:00)
- UK Aug. BBA Loans for House Purchase (08:30)
- Sweden Riksbank’s Deputy Governor Floden to Speak (09:30)
- UK Bank of England’s Miles to Speak (10:30)
- UK Bank of England’s Salmon to Speak (11:00)
- Canada Jul. Retail Sales (12:30)
- UK BoE Deputy Governor Tucker to Speak (12:45)
- US Jul. S&P/CaseShiller Home Price Index (13:00)
- US Sep. Richmond Fed Manufacturing Index (14:00)
- US Sep. Consumer Confidence Index (14:00)
- US Fed’s George to Speak (17:00)
- UK BoE Deputy Governor Bean to Speak (17:00)
- New Zealand Aug. Trade Balance (22:45)
- Japan Aug. Corporate Service Price Index (23:50)
- Japan Sep. Small Business Confidence (05:00)