It was one word that dominated the first half of the last trading week… patience. Would it be taken out of Fed speak and thus indicate a move towards the beginning of the US tightening cycle?
The answer came on Wednesday from the lips of chairwoman Yellen who did indeed leave out the word in her economic statement.
However fed speak continued to turn much more dovish than the market expected and the ensuing volatility left the charts looking like a war zone.
This why trading is not advised during FOMC meetings
It is interesting to note just how much monetary policy of the Fed affects market behaviour. It didn’t go unnoticed among the analysts that the volatility seen last Wednesday gave way to the biggest day moves since 2008/2009 at least as far as the majors were concerned. What does that mean? It means the Swiss debacle, QE announcements geopolitical crises and the threat of Eurozone breaking all had a lesser effect than one statement from the FOMC. Thats a significant insight into current market psychology and one we cannot afford to ignore, or at least do so at our peril.
Last week I discussed the concept of the decision gap, as the window of opportunity for traders to form sentiment towards a particular event or the prediction of its effect. It was clear last week before the meeting that the market was split on the outcome and uncertain as to the effect the statement might have. In the event the effect was fast and furious. The chances for volatility were high and the opportunity, the decision gap, was 3 days long and plenty of time to tighten stops, take profits and reduce risk.
Response v Reaction
Then there was the aftermath. There are always traders prepared to jump on a moving train only to see it derail. Then perhaps another group having resisted the ‘punt’ trade (thats gambling) observed the spikes that to all intents and purposes appeared to test previous levels and implied a resumption of the underlying trend. They may have been tempted to re-enter the fray. Another reaction. Where the virtue of patience really pays, is where we give ourselves the time to respond rather than react.
On Thursday and Friday it was clear that the market has not digested the tone of the FOMC sufficiently to predict a further pull back or a continuation of the strengthening path of the USD. What we saw in the candlesticks was indecision and confusion. We simply do not know. What we can do is re-asses the underlying fundamentals and watch to see the big players reveal their sentiment. You can see from the charts the USD weakness as Sunday trading opened.
FOMC Language
The situation in the US has not fundamentally changed but has rather shifted. The US are still looking to recovery and still intending a tightening cycle. The confusion reflected in the market is due only to changing perceptions of the speed of the recovery. In Yellen’s own words… “just because we removed the word ‘patient’ doesn’t mean we’re going to be impatient.”
The divergence between US monetary policy and all other global economies, is still very much in evidence. There was an expectation that Ms Yellen would attempt to’cool’ the pace of the strengthening dollar and did make a reference to exports dipping as an inevitable result.
It seems an obvious point to make, but we do know for sure that currency levels are on Fed watch. We know too that policy divergence has been factored in. What we cannot yet predict is whether and to what extent the currency has got ahead of itself. Unlike last week, we have returned once again to an arena where pair selection needs care and that requires knowledge of the comparatives .
The Truth about the Eurozone
Not much has changed here fundamentally either. The QE commenced this month has a projected course of 18months. That is a lot of liquidity. Greece, even with signs late last week of common ground with the major EZ players has a long way to go to be seen as secure. A reform program is due within a few days from the Greek government if they are to receive the money they need and plenty of room for upset as politics may well outweigh the common intent of an integral EZ.
Parity with the dollar in these circumstances, is still on the radar but beware the pullback. Improving data and signs of political compromise may well determine the level at which the Euro once again becomes attractive as a short and it may well have some distance to go before it does so.
Equities
A strong buying week in equities,the Europeans, buoyed up by the promise of long term QE continuing the purchase of Euro stocks. Here is the daily Eurostox 50
and the UK saw the FTSE recovering three weeks of losses and closing on a new high. The S and P 500 also enjoyed a strong week and closed near to the high also achieved three weeks earlier. The US equities approved of the linguistic brakes the FOMC applied to the interest rate hike forecasts as this daily chart shows us;
The Bond Aspect
The US10yr note: Last week during the FOMC meeting we saw a dip down back below the 2% mark as they reflected the softer tone coming from the FOMC.
It closed at 19.3
And then course we should take a look at the German 10 yr comparative bund yield. This one has a shifted decimal point (!) at 0.19. Of course the shorter bonds are in negative territory but for a 10 year note fallen from 0.80 since November to such a low point is a disturbing statistic; Chart courtesy of stockcharts.com;
Forex volatility
Volatility in our VIX indicator only gives information of movement and an assessment of sentiment in the S and P index. It shows a reduction back down to 13.02.
However it was obvious to anyone involved in Forex trading last week that the volatility and the fear factor in this market was very evident. Take a look at the Euro on a H4 chart just in case you missed the drama!
All the majors and many cross pairs experienced the same wild swings.
Oil and Commodities
Yet another inventories report in the US showed a surplus, as another 4.5m barrels were added although in-line with the expectation. Oil has consolidated near the low of 44.02 established in late January after the rout. It tested it to the pip. Now we are looking at a much bigger range of 44 to 56. The sensitive commodity currencies will be watching where we go from here.
The commodity index did pull up from its own low giving some promise of relief to inflation factors that it affects;
On the Radar
The coming week contains more catalysts as we watch for the PMI numbers from Europe and the US. One to watch is CPI from the US and the UK, as a major indicator of inflation. This is on Tuesday. Additionally we have both Draghi testifying on monetary policy on Monday and Carney speaking on Friday. The week will also give us NZD trade balance and will close Friday with US GDP. As we saw from our charts last week, monetary policy and the differentials are major factors to monitor as focus trains in on inflation and interest rates.
Wait, Watch and Exercise Patience!
Yes, that word again. Despite a plethora of shooting stars that were on display in the majors it cannot be assumed that the USD will not pull back further. In such an environment a careful look at the comparative strengths and weaknesses of the global economies will help make that pair selection a little safer.
So will permitting a little more digestion of last week’s events by the big players. There may be some long profitable trends about to start but we do not know where and when they may begin.
Caution is advised and we may well be in for some more choppiness and increasing volatility before any clear direction is established.
Judith Waker
0 Comments