Originally published by AxiTrader
Market Summary (FOMC day March 22 – 7.30 am AEDT)
The Fed has delivered an almost perfectly pitched statement and outlook this morning to accompany its decision to nudge rates another 0.25% into the 1.5%-1.75% range. They highlighted the “stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation” and the dot plot was just one participant away from reflecting 3 more hikes this year.
The forex market reaction has been to sell the US dollar because the read has been that the Fed was not as hawkish as expected. But it’s a very fine run thing and likely reflects positioning more than an actually objective read of the statement, accompanying projections, or even Chair Powell’s press conference.
But clearly the short term market was more skewed for a very hawkish Fed than I certainly appreciated. Just look at the move in the Australian dollar, which has climbed to 0.7770, up half a cent from just before the Fed announcement, for a rise of 1.1% since 8am yesterday. The euro is up 0.75% at 1.2332, the pound has rallied to 1.4135 for a 1% rise, while the yen has strengthened half a percent to 106.00. The kiwi and Canadian dollar are also higher – up 0.74% and 1.3% respectively.
Stocks have got a different message to forex traders however with the post announcement rally fading into the red. The S&P 500 finished down 0.18%, the Dow lost 0.18% and the Nasdaq dropped 0.47%. Bonds are a little lower however with the 2 year note at 2.30% and the 10 year note at 2.87%. These had been higher earlier but have drifted lower with stocks.
So it is a maelstrom of moves and reactions to the Fed. My take is that Powell has been a great pick, he was in his element and was the very model of what a central banker should be. He just oozed gravitas. Moving beyond appearances though it seems a Powell Fed believes the US economy is strengthening, believes to raise rates too slowly would risk the economy, dissed the dot plot saying, “2.7% might be the median but it doesn't say what we think is possible”, didn’t appear worried about the threat of tariffs, and was honest enough to say who knows about three years out.
This is a Fed that is likely to raise rates 4 times this year on current settings.
On commodity markets oil’s break out continued amid technical impetus and more geopolitical and market balance concerns. Indeed the EIA crude inventory data showed a draw of 2.6 million barrels not the 2.6 million build forecast. WTI is up another 3.08% to 65.50 and Brent has climbed 3.49% to $69.77 as a result.
Gold is also higher this morning fairly roaring at $1333 – it’s gained $13 since the Fed meeting. Copper is a little stronger as well up 1.43% to $3.08 a pound in what’s been an otherwise red day for base metals. Iron ore appears to have stabilised.
On the day it is employment in Australia which is the key release with the market forecasting 20,000 jobs and an unemployment rate of 5.5% in February. Globally it flash PMI day where we get a sneak peek at the actual numbers to be released early in April. German IFo is also out along with British retail sales.
And of course the BoE will be up at 11pm tonight.
Here's What I Picked Up (with a little more detail and a few charts)
International
- I’ve written lots of words above about the Fed. But the best summary I’ve seen so far comes from my old mate Richard Franulovich from Westpac in New York. Here’s his tweet and summary. It is all you need to know.
- Unless you want to know what actually changed in the statement. In which case I offer you this via Zerohedge.
- Okay, I mislead you. One final tweet which I agree with 100% (my annotation)
- One other really big thing happened in a macro sense last night. We heard from US negotiator Lighthizer on the tariff proposal. Or more correctly we heard that the China tariffs are coming and that if China gets Bolshy and target Soy and other agricultural products the US will take further measures. So we need to watch this space even though the Chinese keep saying they don’t want a trade war and signalling they will open up the economy. Key here is that the US believes China has purloined the IP, and thus profits and jobs, of thee US and its companies (as the tweet below shows). So they are likely to push if China reacts.
- And finally for today, the RBNZ has announced that it left rates at 1.75%. The key for me is the last line. “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly” the bank said. The NZD has not reacted to the announcement having ridden higher on the back of the weaker US dollar.
Australia
- It’s employment day today in Australia with the market expecting a rise of 20,000 jobs in February and an unemployment rate of 5.5%. That’s not going to impact the market unless it is either a very big beat of a big miss. I say that because thee reality is we have the parameters for our market at present where we know sellers lurk and buyers stand ready. Inside that range it’s short term factors and the movements in US and global stocks which are the key.
- To that end the SPI traders have knocked 10 points off the June contract overnight as prices continue to trade within a reasonably narrow range since the big fall two days back. That fall, from a high of 5,979 to a low of 5,890 on Monday is the constraining force for prices. A break of that is necessary to get the next leg moving.
- Turning to the Aussie dollar now and what can I say? The battler surged, along with the euro, yen, gold, anad other US dollar denominated assets when it became apparent the dot plot suggested only 2 more hikes this year not the three the market had clearly factored in. The US dollar took a belting in another sign that there are not only trends in where currencies move but how traders view currencies. We’ve seen this before where traders skew everything they see and hear either positively or negative for one side of an exchange rate and at the moment the US dollar just can’t take a trick.
- Should the Aussie dollar really be higher by more than 1% on the back of this FOMC announcement? Of course it should not. But it is and that is the important fact we need to take into account today. The market was clearly more skewed than I thought and vulnerable for a squeeze – it’s gone about 30 points higher than I thought it would. That means today’s employment is an even bigger event than usual. The question is whether a good result is now factored in or whether a 25,000 or more increase would see the AUD/USD trading with a 78 handle. We’ll know at 11.30 am AEDT. And it’s clear after a rally like this the Aussie is vulnerable to a weak outcome.
Forex
- I have said a lot about the US dollar in the very short term context above. So I won’t put empty words on this page. What I will do though is focus on the medium term and on that basis 2 things are clear. First, the US Dollar Index has failed to break 91 and as such thee best we can say about the dollar is that it is in a range and consolidating within an overall down move. The second is that the sharp bounce of the euro (and fall in USD/JPY) tells us that these two pairs are range bound for the moment. In the case of the the euro it is 1.2150/1.2550. For the yen it is 105/108.
- For the US dollar to materially move we would need to see these ranges break. Unless or until they do we are just trading noise and the range. And that is critical to so many other exchange rates and forex pairs as well. Euro and yen really are the bellwethers. But I increasingly like the pound
Commodities – Oil
- Oil is roaring higher and there is nothing like a bit of geopolitical tension combined with a clear technical break, and an unexpected draw in inventories to push prices. And that is essentially the story we have of oil overnight.
- Yesterday I wrote that $69.12 was in play for Brent and we have blown through that level with prices at $69.71 this morning. In my video yesterday I suggested that both WTI and Brent could head back to the recent highs when I looked at the charts. And that’s the impression I am left with this morning. A full round trip to recent highs seems a good chance. That would leikly pull prices up again – because we are establishing a range now – but if that high breaks we could see the mid $70’s to low 80’s as a Fibo projection for Brent easily. Here’s the chart:
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Have a great day's trading.