What Can We Expect From The Fed: While a rate hike isn’t expected at this meeting, it is really all about the accompanying policy statement and the famous dot plot. A Closer Look At Bonds: After last weeks increase in monetary stimulus by the ECB, the global bond markets have begun to pick up some steam. Up Next… Bank Of Japan: No change in policy is expected at this decision, however the BoJ are heavily keen on devaluing the Yen. Will Finland drop the Euro? It seems that Britain’s referendum may have set a dangerous precedent. Euro Rallies Off Draghi’s Final Push
What Can We Expect From The Fed
16.03.2016 Although we see U.S CPI released beforehand, the FOMC meeting will steal the limelight today. Nobody is expecting a move at this meeting, but as we’ve spoken about before, the improvement in the jobs market, the commodity price rebound, as well as a relaxation around market conditions worldwide, has surely given reason for the Fed to relax and head forward on the path toward monetary policy normalisation. Something markets aren’t quite pricing in and where some short term trading opportunity lies. While a rate hike isn’t expected at this meeting, it is really all about the accompanying policy statement and the famous dot plot. Due to the recent market reversal and injection of optimism, Yellen is more than likely going to be quite hawkish at this meeting. If the Fed does want to raise rates again this year they will need to give some inkling of their intentions at this FOMC Press Conference.
If they went down the dovish route, then more than likely we’ll hear their reasoning backed up by the China and emerging market growth scare. The only other piece of data that I can think of which could potentially cause a dovish Fed speech would be the recent poor ISM Manufacturing PMI releases. These are survey’s however and so don’t actually provide statistically sound information; they are more of an economic sentiment reading. Although the U.S services sector looks to be still growing, according to the ISM Manufacturing PMI Survey, the U.S fell into contraction in their manufacturing sector. This could cause some dovishness from the Fed, however I highly doubt that it will even be mentioned. Regarding inflation and unemployment, both are seemingly performing within expectations; with inflation still stalling due by in large to global Oil prices remaining low and unemployment dropping to below 5%. The fact that Oil seems to be slowly gaining some bidding support, along with the recent surge in equities and brief weakness in the U.S dollar, it seems that we are ripe for a hawkish conference.
A Closer Look At Bonds
15.03.2016 After last weeks increase in monetary stimulus by the ECB, the global bond markets have begun to pick up some steam. It seems as though Draghi’s stimulus package may actually be what the periphery economies of Europe actually need. German bonds have begun to fall from their enormous highs with other European nations reaping the rewards. Draghi will also begin to purchase Corporate bonds, which saw a huge surge post the announcement. On the other side of the Atlantic we have a completely different story. U.S Treasuries have been declining ever since their huge spike upwards on the 11th February. Of course this spike higher was due to panic buying off the back of the double bottom low in the U.S Stock Market that occurred over the same time. We just bounced off the 61.8% retracement from the high on Feb 11th and look to be turning around. As long as the Fed hold still on rates at the meeting tomorrow, we should see a ranging market in regards to U.S Treasuries; probably moving back and forth between 128.30 and 130.00.
Up Next… Bank Of Japan
14.03.2016 No change in policy is expected at this decision, however the BoJ are heavily keen on devaluing the Yen. At their last meeting they unexpectedly cut rates, however nothing much happened in regards to the markets following the decision; in fact the Yen continued to rally. Because of this, many are expecting another unexpected call from the BoJ, as they’re always good for a shock to the markets. The Bank of Japan’s Governor, Haruhiko Kuroda recently signalled that the BoJ isn’t considering any further easing for now. The issue is both inflation, which is again declining in Japan, and the recent strengthening in the Yen. We’ve seen this picture before and that’s why many are expected the unexpected from Kuroda. Currently we’re trading near a long term weekly tend line in USDJPY, and for the last few weeks have been consolidating. It does seem like it’s time for a breakout either way. The key resistance level is 114.50. If we can clear this then there is massive up side potential. This theme also goes well with the risk on sentiment currently running through markets. Either way, we should see Governor Kuroda attempt to talk down the Yen this evening. If further easing isn’t instituted, then expect some bearish comments.
Will Finland drop the Euro?
11.03.2016 With the possibility of Brexit looming, other European countries have taken note. The people of Finland have put at least 53,000 signatures on a petition for a referendum on whether Finland should abandon the Euro. The people of Finland are dissatisfied with the recent economic growth of the country citing Sweden, not a member of the single currencies growth, as an argument for the separation. Johanna Sarhimaa a Parliamentary Secretary stated “We haven’t decided the date yet but a preliminary debate will likely be held during a plenary session (of the parliament) in the coming weeks,”. Finland’s economy has gone through four years of sustained contraction and the government has projected growth figures of just 0.4% this year; this is primarily due to Russia’s recession, the cost of labour in Finland and finally Nokia a failing Finnish giant. The effects of this petition may be limited, but given the increasing fractures within the increasingly disunited European Union. It seems that Britain’s referendum may have set a dangerous precedent, with the potential for more European countries to follow suit. The Euro itself experienced major gains today against the dollar in the wake Mario Draghi’s slew of QE policies, most surprising of all the refinancing of European corporate debt, however it could be all downhill from here with an increasingly fractious currency union and the ECB ever more limited tool box.
Euro Rallies Off Draghi’s Final Push
11.03.2016 We saw the biggest single day rally since the last cut in the deposit rate back in December, off the back of yesterday’s ECB press conference; a scenario that Draghi probably wasn’t hoping for. Initially, Draghi’s package of cuts and stimulus was taken as expected and EUR/USD dropped 150 pips like a stone. But reality soon didn’t line up with expectations as Draghi signalled that there would be no further cuts from here. As traders, it is all about expectations and managing where the greatest risk will lie. As you can see above, yesterday we spoke about the market being overweight short while ALL expectations were on Draghi delivering on his promise of more cuts and more stimulus. This meant that if things didn’t go to plan then the greatest risk would be an upside spike. So what did the ECB actually do? Cut in the deposit rate further into the negative from -0.3% to -0.4%. Increased QE stimulus from €60 billion per month to €80 billion per month. Expanded QE to include the buying of corporate debt. Even with never ending QE, slashed inflation targets. “Rates will stay low, very low, for a long period of time and well past the horizon of our purchases.” “From today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further.” The funny thing is, Draghi and the ECB were blunt about what they are doing and have been smashed for it. If they had continued to drip feed markets with forward guidance, which everyone knows wasn’t going to eventuate, the Euro probably would have fallen. The trading lesson to be taken away here is managing the differences in expectation and reality. This scenario plays out over and over, month after month across all major news releases. You just have to change your thinking.
