Do investors have time to let some of this week’s open wounds heal? Time is a commodity we are trading. The market assumed that Ben and company would perhaps be a "wee bit" more patient with their liquidity presents – not so. It seems that they may want to take them back sooner than perceived. The Fed is not poised to raise rates anytime soon, but assuming key data keeps improving, they will look to trim the monthly $85 billion bond purchase later this year. This week’s precise FOMC message has resulted in aggressively pushing U.S. Treasury yields to reach 21-month highs, allowing the “mighty buck” to rule once again.
The Fed Committee has judged that the downside risks to the outlook for the economy, specifically the labor market, have lessened over the last eight months. Chairman Bernanke stated: “If the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear”. A percentage of the market had been expecting for the first cutback in the Fed’s $85b a month QE3 program asset to begin in September. However, with the current aggressive asset pricing is indicating that the end of July’s FOMC meet is now in play. This is of course is assuming that the U.S. labor market data does not deteriorate and inflation expectations hold near their new levels.
The market's post-FOMC reaction is highlighting the lack of liquidity and risk taking in rates and fixed income markets. Could the rallies now be relatively shallow from here? 2015 is earmarked as the earliest hike date. However, with the FOMC Committee striving for a+6.5% unemployment next year would surely increase the possibility of an earlier hike – maybe 2014? The surprisingly hawkish tone this week from the FOMC would suggests that investors should be expecting further tightening on the stronger U.S. fundamentals. This scenario certainly bodes well for the “mighty dollar's” future. However, will every NFP print from here on in post close to +300k and change? That’s what is required to drag the U.S. unemployment rate lower, sub +7%.
With the Fed dominating market direction, the better than expected composite prints from France, Germany and eurozone this week has been very much drowned out, discounted and ignored. Anxiety, mass liquidation and margin requirements have been pushing G10 currencies to test some key support levels, as 21-month U.S. yields highs force the USD to the "top of the pile". With so much market intensity having been built up, investors and dealers are grateful with the lack of fundamental releases today. Is this market in the process of catching its second wind perhaps?
Euro bourses, crude and precious metal prices have staged a modest recovery ahead of the U.S. open this morning. The markets are trying to instill some sense of normality after this week's rout over the FOMC exiting fears. Is this the mini-"calm before the storm"? After two heavy sessions of major losses, can the individuals that have been caught in the headlights hold their nerve even further? The fundamentals will not be playing a role today; this market will be technically driven, perhaps leading to a further potential sell-off ahead of the weekend.
Emerging central banks continue to be active, trying to take measures to stem the slide of their own currencies. This has raised “the likelihood of rebalancing flows supporting the dollar in the majors.” Despite these currency moves that have been rather large, they have yet to spur “true risk aversion” in their region. For anyone to hedge their bets, they ironically are required to buy some USD. It seems that many individuals are reluctant to do this, mostly on the back of having to exit similar positions just only last week. It’s worth noting that the trade of the moment has only a reluctant few traders on board so far.
The EUR’s minimum downside target of 1.3170 is in danger of being triggered, potentially opening up a route to 1.3110. The market will be expected to remain short-term bearish as long as we stay below 1.3325. For the yen, despite Japanese repatriation continuing, the dollar remains to be bought on dips -- above ¥97.00, the next target is ¥99.00+. A close above ¥97.57 is needed to strengthen the strong dollar argument further. Last week, Japanese residents sold -¥402b of foreign bonds, up slightly from the preceding week. Even the selling of foreign equity continues, although at a slower pace. PM Abe and BoJ will be much relieved with the market's current price action, but for how long?