The bond market finally topped out and reversed course ahead of the FOMC meeting today, a pattern that was mimicked by the Japanese Yen and Swiss Franc. What gives? Also – more on what to expect from FOMC today.
Being franc
Very interesting moves in the Swiss franc today, with no apparent driver for the action other than the obviously large anticipation surrounding the FOMC announcement and the recent nervousness in sovereign debt spreads in Europe. CHF has tended to the strong side of late on the strength in government bonds, which help it out from a yield comparison perspective, but also on the spiking spreads in European sovereign debt, as the franc has often served as a safe haven from Euro-stress via the EURCHF cross. Today, as Greek 2-yr. yields spiked anew to above 25% (though important to note there was no contagion evident in the Spanish/German spread today), EURCHF spiked all the way down to 1.2750 before launching a sharp recovery most of the way back to 1.2900 as of this writing. This is an interesting reversal from a technical point of view and other crosses like GBPCHF reversed from interesting level as well.
Very interesting moves in the Swiss franc today, with no apparent driver for the action other than the obviously large anticipation surrounding the FOMC announcement and the recent nervousness in sovereign debt spreads in Europe. CHF has tended to the strong side of late on the strength in government bonds, which help it out from a yield comparison perspective, but also on the spiking spreads in European sovereign debt, as the franc has often served as a safe haven from Euro-stress via the EURCHF cross. Today, as Greek 2-yr. yields spiked anew to above 25% (though important to note there was no contagion evident in the Spanish/German spread today), EURCHF spiked all the way down to 1.2750 before launching a sharp recovery most of the way back to 1.2900 as of this writing. This is an interesting reversal from a technical point of view and other crosses like GBPCHF reversed from interesting level as well.
Chart: USDCHF
The trend followers have been milking the USDCHF downtrend for all it is worth lately, with an additional blow-off rally today in CHF strength ahead of the FOMC meeting. But the later European session today saw a huge bout of profit taking on no evident news flow (though there was a top out and reverse intraday in the bond market that coincided with the move), creating a reversal pattern from interesting levels in EURCHF (just ahead of 1-month lows) and GBPCHF (very close to the recent post-Japan earthquake all time low). With such an important event risk today, it will be interesting to see whether major CHF crosses are trying to scratch out a turnaround here.
The trend followers have been milking the USDCHF downtrend for all it is worth lately, with an additional blow-off rally today in CHF strength ahead of the FOMC meeting. But the later European session today saw a huge bout of profit taking on no evident news flow (though there was a top out and reverse intraday in the bond market that coincided with the move), creating a reversal pattern from interesting levels in EURCHF (just ahead of 1-month lows) and GBPCHF (very close to the recent post-Japan earthquake all time low). With such an important event risk today, it will be interesting to see whether major CHF crosses are trying to scratch out a turnaround here.
Odds and ends
The S&P bond ratings agency found an easy target in Japan, downgrading its AA- credit outlook to negative from stable on fears. The JPY weakened sharply on this news after pushing to its strongest level in a month overnight. It is no coincidence that US bonds peaked out today and reversed rather sharply ahead of the open of equity trading today and the movement in bond markets in the wake of the FOMC will be far more important than any fallout from this announcement. To the upside, that 82.50 area is a key pivot zone for the USDJPY and the 200-day moving average is a bit higher at 83.20.
The S&P bond ratings agency found an easy target in Japan, downgrading its AA- credit outlook to negative from stable on fears. The JPY weakened sharply on this news after pushing to its strongest level in a month overnight. It is no coincidence that US bonds peaked out today and reversed rather sharply ahead of the open of equity trading today and the movement in bond markets in the wake of the FOMC will be far more important than any fallout from this announcement. To the upside, that 82.50 area is a key pivot zone for the USDJPY and the 200-day moving average is a bit higher at 83.20.
Overnight, higher than expected Australia CPI data boosted the AUDUSD above 1.08 for the first time in modern memory. Interesting that this latest sharp leg up is taking place ahead of a critical event risk and with some of the important materials stocks (particularly BHP Billiton) and related commodities not having a banner day today. AUD crosses certainly would appear to have some of the highest volatility potential in the wake of today’s FOMC proceedings.
The US Durable Goods Orders numbers were better than they appeared on the surface, with the ex Transportation number coming in at +1.3% MoM, though this was from a sharply upwardly revised Feb. number (revised up to +0.6% from -0.6%) And the ex-aircraft, ex-defense capital goods orders were also strong considering the very sharply upwardly revised Feb data (from -1.3% to +0.5%)
Looking ahead
We’ll have a quick and dirty analysis of the new FOMC statement when it is released today (note the earlier release time of 1630 GMT) and then we’ll discuss Bernanke’s performance in the immediate wake of his first press conference, which is scheduled to start at 1815. Here’s a good Bloomberg article that gives a good idea of what the consensus is looking for from this meeting.
We’ll have a quick and dirty analysis of the new FOMC statement when it is released today (note the earlier release time of 1630 GMT) and then we’ll discuss Bernanke’s performance in the immediate wake of his first press conference, which is scheduled to start at 1815. Here’s a good Bloomberg article that gives a good idea of what the consensus is looking for from this meeting.
The Bloomberg article shows the debate on when the Fed will phase out the “extended period” phrase on how long it plans to keep rate this low in the September to November time frame. That being the case, it is easy to see why the USD is weak in a world of 46-dollar silver and 125-dollar crude. In this environment, it would appear that the only thing that could disrupt the dollar’s decline are signs of weakening economies around the world (which would challenge the “buy everything else trade”), a strong tilt in the hawkish direction for the Fed provided by signs of a growing and more hawkish minority, or anything else that might trigger a bout of risk aversion.
At some point between now and the end of June, the market will at least have to take a break from its ever upward spiral to recognize the import of the QE2 program drawing to a close. As endless analysts have been point out – the S&P (and global risk assets in general, we might add) are highly correlated with the size of the Fed’s balance sheet. While everyone can talk up the likelihood of QE3, it’s not here yet and we have a known date for at least a pause in the balance sheet growth.
In the meantime, the most plausible source of surprise from today’s FOMC proceedings are, on the minor side, how the Fed words its inflation statement (expectations are for the “transitory” language, but the Fed might give itself an out by indicating what conditions would cause it to change its views on inflation) and on the more interesting side, how many dissenting votes we get and what those dissenters will say. Relative to the consensus expectations, there are at least four known FOMC voters that are not happy (particularly Fisher and Plosser, but also Bullard and perhaps Kocherlakota) and we have a hard time seeing all of them signing off without a protest on the dovish cabal’s musings today.
In the meantime, the most plausible source of surprise from today’s FOMC proceedings are, on the minor side, how the Fed words its inflation statement (expectations are for the “transitory” language, but the Fed might give itself an out by indicating what conditions would cause it to change its views on inflation) and on the more interesting side, how many dissenting votes we get and what those dissenters will say. Relative to the consensus expectations, there are at least four known FOMC voters that are not happy (particularly Fisher and Plosser, but also Bullard and perhaps Kocherlakota) and we have a hard time seeing all of them signing off without a protest on the dovish cabal’s musings today.
Economic Data Highlights
- Japan Mar. Retail Trade out at -7.8% MoM and -8.5% YoY vs. -5.3%/-6.1% expected, respectively and +0.1% YoY in Feb.
- Japan Apr. Small Business Confidence out at 36.1 vs. 49.5 in Mar.
- New Zealand Apr. NBNZ Business Confidence out at 14.2 vs. -8.7 in Mar.
- Australia Q1 Consumer Prices out at +1.6% QoQ and +3.3% YoY vs. +1.2%/+3.0% expected, respectively nd vs. +2.7 YoY in Q4
- Australia Q1 RBA Trimmed Mean Prices out at +0.9% QoQ and +2.3% YoY vs. +0.7%/+2.1% expected, respectively and vs. +2.2% YoY in Q4
- UK Q1 GDP out at +0.5% QoQ and +1.8% YoY, both as expected and vs. 1.5% YoY in Q4
- UK Feb. Index of Services rose +0.6% MoM vs. +0.2% expected
- EuroZone Feb. Industrial New Orders rose +21.3% YoY vs. +21.8% expected and +21.9% in Jan.
- Germany Apr. CPI out at +0.2% MoM and +2.4% YoY, both as expected and vs. +2.1% YoY in Mar.
- US Mar. Durable Goods Orders out at +2.5% MoM and ex Transportation at +1.3%, vs. +2.3%/+1.9% expected, respectively
- US Mar. Capital Goods Orders ex-Defense and ex-Aircraft out at +3.7% MoM vs. +3.8% expected
- Canada Feb. Teranet/National Bank Home Price Index rose +0.1% MoM and +3.8% YoY vs. +0.2%/+4.1% expected, respectively and vs. +3.9% YoY in Jan.
Upcoming Economic Calendar Highlights (all times GMT)
- US DoE Weekly Crude Oil and Product Inventories (1430)
- US FOM Rate Decision and Monetary Policy Statement release (1630)
- US Fed’s Bernanke to Speak at Fed Press Conference (1815)
- New Zealand RBNZ Cash Rate announcement (2100)
- UK Apr. GfK Consumer Confidence Survey (2301)
- Japan Apr. Markit/JMMA Manufacturing PMI (2315)
- Japan Mar. Overall Household Spending (2330)
- Japan Mar. Jobless Rate (2330)
- Japan Mar. National CPI (2330)
- Japan Mar. Industrial Production (2350)
- Japan Mar. Housing Starts/Construction Orders (0500)
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