QE Tapering? Plenty Of USD Bulls At ICU Assuming So

Includes: UDN, UUP
by: FXstreet

The price action that has hit the market in the past few weeks is nothing short of impressive, with commentators struggling to make sense out of all this mess in prices. The market is presently governed on such a multi-theme basis that makes it both a mine of opportunities yet at the same time such an irrational place.

If the market did not have enough tumultuous' headlines, which culminated yesterday with a -6.23% fall in the Nikkei, Fed watcher Jon Hilsenrath put out an article before the U.S. close suggesting that Bernanke is still miles away from considering any kind of tightening in rates as hopes have built up on a possible tapering in the next few months.

Kathy Lien, Co-Founder at BKAM, thinks Hilsenrath's article is not that supportive for stocks because, as Lien points out, "his conclusion of the Fed no way near raising interest rates is based on the U.S. economy not [being] strong enough to handle it."

Where are we at? From USD ruling to sustained weakness

In the second quarter of 2013, markets have gradually turned the thought of tapering into a reality, as exemplified by the broad-based USD gains through May, only to suffer a massive washout which sees still no end in sight. Is the market realizing that tapering will not happen that quick, thus the realization of an excessive pricing of a Fed QE exit strategy?

Adam Button, editor at Forexlive, makes an analogy of the market by suggesting us all to use our imagination to picture 100 people in a room, trading billions of dollars and with no idea of what's going on: "That's Wall Street at the moment," Button says.

Button has identified four main themes underway in the market at the moment. The first is the rout in the Nikkei, defined as "irrational exuberance," secondly, there is a massive unwinding of carry trades and bets on emerging markets.

Thirdly, "this sparked a rush from emerging markets to yen, dollars, euro and sterling while AUD was smoked by carry trade unwinds. The idea that the Fed would taper kept the dollar buoyant at the same time," Button added.

The fourth item is actually the idea of tapering not coming into fruition in the near term, speculating that "with conditions like this and bond yields up 50 bps, the Fed simply will not taper," which suggest further room for USD.

Markets are clearly experiencing a dislocation of assets, but we are still in a very indecisive early stage where the motives behind current moves are being driven by dangerous assumptions without enough justification, it seems.

Moves likely to appease until FOMC

But until Ben Bernanke speaks at next week's FOMC press conference, new information to decipher the actual puzzle is close to 0. From his speech we will know whether the tumultuous market conditions are set to continue or abate. The former is the most likely though, as the ball of expectations/dislocations has now gotten too big to easily ignore.

According to Greg McKenna, Founder at GlobalFX, "the talk of tapering next week from the Fed is likely even if they are going to try to do it in a way that is least disruptive to markets."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.