The FOMC statement could not be more in line with basic expectations today and more boring to read.... The initial description of the economy was upgraded in very minor ways: employment was described as "beginning to improve" rather than "stabilizing", etc... The following key phrase about the Fed's intentions was kept completely unchanged:
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
Even Hoenig's dissent related to the above statement was unchanged from the last time around.
The statement dropped the reference to the $1.25 trillion in mortgage purchases and $175 billion in agency debt since those asset purchase programs expired at the end of March. Of the possible scenarios we mentioned in this morning's FOMC preview:
"...our expectation is for a virtually unchanged statement, that might be celebrated briefly for its implications on continued easy liquidity and the speculation that this drives, but then the market will get back down to sorting through the implications of the EuroZone situation and worries over the financial reform debate. It's either that scenario, or a scenario in which the new bears, and red-eared bulls who capitulated yesterday and are scrambling to re-establish their longs continue to bid up risk all day long, only to find more caution on the other side of the FOMC."
It looks like in the wake of the FOMC statement we are getting the "brief celebration" of the implications of the still-dovish Fed. So the question is whether we see renewal of caution already in the next 24 hours, or if the market wants to get back to its old rallying ways immediately.
In other news today
Dominating the action today was another downgrade of sovereign debt with a downgrade of Spain's bonds to AA and putting the outlook on negative. If only the S&P had been so vigilant on sub-prime CDO's ! The Spanish downgrade pushed EURUSD all the way down to 1.3115 at one point before it recovered for a renewed attempt at the 1.3200 resistance after the FOMC meeting. In the US, a first vote to open up debate on the financial reform bill failed in the Senate, but they may try to stage another vote on whether to open up debate as early as this evening.
Dominating the action today was another downgrade of sovereign debt with a downgrade of Spain's bonds to AA and putting the outlook on negative. If only the S&P had been so vigilant on sub-prime CDO's ! The Spanish downgrade pushed EURUSD all the way down to 1.3115 at one point before it recovered for a renewed attempt at the 1.3200 resistance after the FOMC meeting. In the US, a first vote to open up debate on the financial reform bill failed in the Senate, but they may try to stage another vote on whether to open up debate as early as this evening.
Casting about for Perspective
All in all, this has been a remarkable couple of days for FX, with rates reversing more rapidly than in almost any other market. The likes of AUDUSD and NZDJPY, etc.. came completely unglued yesterday, apparently as only the most speculative hands were shaken out of their positions, and today has seen an attempt to re-establish those long risk positions. The JPY rally attempt from yesterday has likewise been roundly and thoroughly rejected, with even the suffering EUR able to post massive gains on the day against the low yielder as bond market frantically sold off today after the panicky accumulation yesterday. The US 5-year treasury yield saw yields at a higher than expected 2.54%, much higher than the benchmark close for the 5-year at around 2.42% yesterday.
All in all, this has been a remarkable couple of days for FX, with rates reversing more rapidly than in almost any other market. The likes of AUDUSD and NZDJPY, etc.. came completely unglued yesterday, apparently as only the most speculative hands were shaken out of their positions, and today has seen an attempt to re-establish those long risk positions. The JPY rally attempt from yesterday has likewise been roundly and thoroughly rejected, with even the suffering EUR able to post massive gains on the day against the low yielder as bond market frantically sold off today after the panicky accumulation yesterday. The US 5-year treasury yield saw yields at a higher than expected 2.54%, much higher than the benchmark close for the 5-year at around 2.42% yesterday.
Chart: USDJPY
Despite the weak USD, the very weak bond market guaranteed an even weaker JPY today, and USDJPY and most other JPY crosses reversed most or all of yesterday's losses. Note that the pair found support at the TenKan line. 94.77 is the high for the cycle.
Despite the weak USD, the very weak bond market guaranteed an even weaker JPY today, and USDJPY and most other JPY crosses reversed most or all of yesterday's losses. Note that the pair found support at the TenKan line. 94.77 is the high for the cycle.
Still, it is hard to believe that the bulls can simply pick up where they left off considering the magnitude of issues at stake. Other risk markets are also been far slower to attempt a comeback, so one can at least speak of an arbitrage opportunity in, say, equities vs. FX pairs positively correlated with risk.
Looking ahead
Remember that the RBNZ is up very shortly - NZD traders must be getting tired after NZDUSD has rushed from 0.7100 to 0.7250, then back to 0.7100 and now at 0.7200 in just three days. The last couple of moves in risk aversion show a speculative market that is nervous and positioned very heavily long in the commodity currencies. If a more sustainable move in risk aversion ever materializes, yesterday is a preview of the kind of action we can expect.
Remember that the RBNZ is up very shortly - NZD traders must be getting tired after NZDUSD has rushed from 0.7100 to 0.7250, then back to 0.7100 and now at 0.7200 in just three days. The last couple of moves in risk aversion show a speculative market that is nervous and positioned very heavily long in the commodity currencies. If a more sustainable move in risk aversion ever materializes, yesterday is a preview of the kind of action we can expect.
Tomorrow we have a heavy data schedule for Sweden, German employment figures, and Norway's March Retail Sales data in Europe. Traders need to watch out for the announcement of a Greek rescue package at any time, which will guarantee wild swings in EUR crosses, even if it's hard to come up with a positive scenario for Europe from this whole problem.
Be careful out there.
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