The weaker market leads from Europe and Wall Street continue to be pushed through the capital markets daily life cycle. Currently, investors and dealers seem non-committed, instead wanting to toe that "risk can" further down the road until they can get a better understanding of the Fed’s overall objectives rather than having to listen to various U.S. policy makers in a different state of address. By week's end, a total of 11-Fed speakers will undoubtedly have confused many investors and dealers alike, and this despite the their new mantra of transparent communication – "opaque" is more accurate.
The Fed’s Dudley and Lockhart are the first it seems to have raised the Fed’s “bar” for tapering after their speeches yesterday. In total, there are another nine-speeches to wade through this week, and the market should not be surprised to hear more “dovish” overtones than usual. Even the Dallas Fed President Fisher is questioning the Fed’s messages, stating that not tapering last week called the Fed’s credibility into question.
For many, it’s expected to take time to build an accurate picture of the Fed’s tapering approach and their eventual rate path timetable. Despite bond yields (particularly the longer end) seeming to be moving in the right direction (down), most of markets attention will be dialing in on Washington, monitoring the U.S. budget and debt-ceiling scrap. The market may become so distracted and preoccupied with the ongoing shenanigans, that expectations of tapering may soon be pushed into early next-year.
In euro-land earlier this morning, despite Germany’s September Ifo Business Climate improving slightly to its highest level in a year – amid higher sales expectations – the market is expected to concentrate on the softer than expected readings in the headlines and current conditions for EUR direction. The headline rose to 107.7, but fell short of consensus of 108.2. Current conditions just fell to 111.4 from 112.0. The reading certainly is further positive proof for Europe’s largest economy. However, despite the market's growing optimism, German exports and industrial production were surprisingly weak at the beginning of H2, mostly on the back of its neighboring trading partner's recovery remaining fragile.
This morning’s weaker German Ifo follows yesterday’s softer manufacturing PMI. If one includes the ECB’s Draghi mentioning LTRO’s yesterday, it is giving investors another reason to sell EUR rallies in these quiet markets. Draghi said that he’s ready to deploy another long-term refinancing operation to provide funds to Europe’s banking system if needed. He further said that while repayment of central bank credit is “certainly a sign of normalization, the resulting reduction in excess liquidity can reinforce upward pressures on term money market rates.” Global EUR offers remain parked between 1.3530-40. Will they be used to shelter stop-losses short term?
Market participants are back reading between the lines whenever there is an economic data release stateside. Even with the U.S. fundamentals seeming to dominate the euro’s, investors should be anticipating more violent moves on major U.S. data points after the Fed losing much of their credibility in light of last week's no to taper decision.
So far the EUR has softened a tad in the wake of the German election results, however it is still sustaining most of the gains seen in the wake of the Fed’s surprise taper hold. Is the single currency’s "left-hand-side" really that exposed? The consensus view is that there will be very little change in German policy stemming from the election. This should have many investors preferring to seek market direction from Fed rhetoric. The decision not to reduce the $85b U.S. monthly bond buy-back program is a blow to the dollar. The EUR techs are trying to plot a higher route for their currency. The Fed’s inaction has many uttering the 1.3850-1.40 levels before the year is out.
The shorter-term focus of the market is likely to fall on the political wrangling in Washington. For the rates market, their focus falls mainly on the debt-ceiling outcome. The Treasury is expected to run out of room by October 24th while some securities maturing at the end of the month could be affected the most by concerns of missed coupon payments. Pricing taper risk will have the forex price action remaining “choppy” and more so with this week's Fed speaker schedule.