FX Thoughts : It’s Not Over Till The Fed Lady Hikes

There has been 2 game changers and another one slated for this Thursday where the ECB is expected to do something drastic or face the displeasure and wrath of the markets.

Yet the ECB had offered to buy 1 trillion in bonds over 2 years just a month ago and all the BoJ needed to do was to offer to increase their purchase by 100 billion last week for the fx markets to collapse completely ?

That is because 1 trillion is too big a number to toss around and people did do the math to realise that ECB is bluffing about it and there is not enough bonds, really, to monetise in the end. http://www.zerohedge.com/news/2014-10-22/someone-didnt-do-math-ecbs-corporate-bond-purchasing-trial-balloon

The FOMC ending their QE took market off guard, to my surprise, because pre FOMC price action appeared so certain with the EUR and gang rallying up right to the last minute.

eur fomc

And the BoJ came just over a day later to wipe the slate clean and a new era for the USD begins.

Now we are sitting at a 4 year high for the DXY index and the analysts are sending out reports screaming to sell the EUR ?

dxy 5 year chartDXY USD Index

Only 3 currencies that matter outperformed the USD last week and they are  the Brazilian Real (+1.75%), Chilean Peso (+1.13%) and Mexican Peso (+0.51%).

The lucky ones were Indonesia, China and Turkey,  unchanged. As for the rest, its been weakening which is good for growth, if we think about it. Gold and Silver were slaughtered because even the Japanese will not buy them.

This week will be volatile but I would not expect extremes, on all these heavy PMI data flow that will cumulate into Friday’s US Non Farm Payrolls. And we have the US mid term elections tomorrow where Obama is expected to be left with a hung government after (am not sure if it increases the chances of going to war or anything).

EVENT 3 NOV

We will have more central banks and lots of speeches, coming later because daylight saving is off.

4 Nov 1130 am RBA Cash Rate
6 Nov 8 pm BOE Bank Rate
6 Nov 845 pm ECB
7 Nov 830 am RBA Statement on Monetary Policy
* all SG time

And the most important for us now, Bank of Japan ! Kuroda will speak on 5 Nov at 1030 am (SG time).

I think the situation is getting electric because expectations have built up for EUR to collapse even further from here and for the ECB to produce something that would match BoJ.

How are they supposed to do that without affecting forward guidance ?

And they would look extremely foolish after saying they would do “whatever it takes” back in July and then conceding that the ECB has reached their limit back in September when they announced their 1 trillion effort when all it took was for BoJ to say they will buy a 100 bio more per year and their pension fund will be buying less bonds, and the markets took off like a roller coaster up.

“Another overlooked development in the past week has been German Finance Minister Schaeuble conceding that the ECB has reached its limit in helping the Euro area even as Draghi did say in his Jackson Hole speech 2 weeks ago that the markets have lost faith in him.” http://www.ft.com/intl/cms/s/0/4219be52-2ec5-11e4-afe4-00144feabdc0.html?ftcamp=published_links%2Frss%2Fcompanies_financials%2Ffeed%2F%2Fproduct&siteedition=intl#axzz3C2v4T8e6

As the roller coaster runs up, it will also run down.

I will be one of the few to expect not much  lower for the EURUSD this week (and vice versa for the USDJPY), after my call of 1.26 was attained (along with the AUDUSD at 0.89) which made up for my losses in the EURJPY.  https://tradehaven.net/market/fx/fx-thoughts-fomc-halloween-edition/

Managed to escape the Gold and Silver rout to note that this break lower spells bad news because we have broken last year’s lows which had been a strong support all these months. Will not be touching the Gold/USD trade for the time being except for black swan reasons which would compel a sell on spikes, noting the Swiss gold referendum coming up at month end. https://tradehaven.net/market/fx/swiss-referendum-the-meaning-of-or-the-lost-cause-of-gold/

Gold

One thing we will have to realise is that FX (or rather, the USD) will be playing a bigger part in portfolios going ahead.

1. FX is a liquid hedging tool
2. FX reacts instantly
3. FX correlations with the various assets classes has increased as the credit markets become increasingly illiquid and stocks suffer from supply (buybacks) and valuation issues

And we would not be interested in the minor currencies as much as the majors because has become a USD marketplace with the BoJ and the ECB playing the supporting roles.

Deep down inside, we think that the BoJ’s theatrics last week will only buy them time which is really what they need (QE took 6 years) before the economy returns to health, and it is the same for the ECB. And given their commitment to ease, it would appear that good economic data would matter much less than poor data.

This leaves the stage for the US to dominate and trading markets to ride the roller coaster which does not end till the Fed Lady Hikes.