Dollar Handcuffed To Fed Rhetoric

by: Dean Popplewell

Despite the Fed leadership being in transition, its policy likely is not. With this status quo, the markets are trading relatively unchanged and with little enthusiasm. Investors and dealers seek a signal, a sign that may change both volatility and volume, making their questionable convictions more tradable. There is considerable competition for this week’s highlight with the U.S. retail sales report and Fed FOMC minutes. A key Bernanke's variable, the U.S. consumer, must again come to the fore and carry the burden of the U.S. economy as they head into their most important holiday season stretch. With the capital markets continuing to focus on the timing of Fed taper, tomorrow's FOMC minutes should be able to give everyone some further insight into the internal debate within the FOMC.

There is a plethora of Fed speakers on the docket this week, and the market is listening for any sign of renewed hawkishness among voting FOMC members. A December taper is looking highly improbable, but there is a train of thought that suggests that the process could begin as early as in January 2014, market consensus has next March back on their docket since Janet Yellen's testimony. Are capital markets capable of decoupling the concept of tapering and interest rate expectations as the U.S. macroeconomic outlook improves? It seems that the masses still need to be reminded of Ms. Yellen's battle cry – tapering is not tightening. The turmoil following the tapering discussions midyear just goes to show how sensitive some emerging markets are to potential changes in U.S. monetary policy. What the U.S. decides to do has a profound effect on the global economy. Seeking an exit strategy must be tried, tested and true. Global economies using QE as an economic stimulus strategy remain in uncharted waters, any reversing can only be hesitant no matter how optimistic anyone is on growth.

Current market sentiment is trying to remain buoyant by optimism over China's reform and Janet Yellen's dovish remarks last week on U.S. monetary policy. Apart from global bourses, the "real" market enthusiasm remains rather lackluster throughout the other asset classes - fixed income and cash. The fact is that central banks continue to have a stranglehold on forex; the RBA is the latest transparent example. Central bank rhetoric and policy actions were a dominant theme at the beginning of this year and continue to be one as we close out this year.

Did the Reserve Bank of Australia minutes last night give the market more clarity around some of the changes in this month's statement? Nope, there was none. The RBA copy gave little additional information to markets relative to the November statement. Policy makers noted that the economy was growing below trend, but that “forward-looking indicators had improved” - the staff forecasts combined an earlier and larger fall in mining investment and weak public demand, but also an improving housing market and rising consumer and business confidence. Governor Stevens has indicated that the Aussie economy was running on empty and he continues to be rather vocal on the overpriced AUD. The currency needs to fall, saying that the Aussie “is still uncomfortably high.” Investors prefer being bearish AUD and expect to see further declines as tapering come back into focus heading into year-end. Currently AUD rallies preferred to be sold.

Using fundamental data as vindication for one's actions is distressing enough. Even this morning German ZEW release does not make it any easier with various components within reports suggesting diverse outcomes. The improvement in the ZEW economic sentiment index continues with a reading of 54.6 in November, better than the 54 expected. However, the current conditions index was weaker at 28.7. Which headline is to dominate? The mixed headline has lent a modest support to German Bunds on the weak current conditions component. The ZEW beat forecasts, but given the ECB cut, it's not that impressive. The market seems to have been net long EUR into the event and investors have been happy offloading or paring their positions into some good bids down below. The techies believe that a daily close below the 1.3500 levels keeps the door ajar for the market to retest the downside towards 1.3375. The bulk of the market sellers remain rooted above at 1.3550-60 level.

Stateside is on Fed speaker alert again today. Chicago Fed President Evans (voter, dove) will speak at 2:15pm EST while "Helicopter" Bernanke (voter, dove) is scheduled to speak at 7 p.m. this evening. Because of the status quo outcome of Janet Yellen’s testimony last week, coupled with this week’s relatively sparse U.S. data calendar, suggests more trade range trading for the "mighty" buck.

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