Boom – Free money and a dovish Fed drive risk higher and the US dollar down

October 9, 2014

It is hard to see the price action we saw overnight and not channel my inner Frankie Valli – Oh what a night!

More correctly what a morning with the release of what appeared to be dovish FOMC minutes igniting a risk on rally which set markets alight. The minutes were taken as dovish by the market meaning that traders reckon it might be a bit longer until rates start to rise.

The US dollar was hit hard as it became clear that members of the FOMC were concerned about the impact of recent strength on growth while stocks ripped higher.

You can see the big moves in the charts above of the Aussie, Euro, Yen, GBP, Gold and the S&P 500 and you can also see that on the very shrt term time frames they are all a little overdone.

But the question for traders as US earnings season kicks off today is whether the rally last night will prove as ephemeral as recent strength or a more sustainable rally or consolidation. For the moment the latter outlook seems more likely but the volatility and the reaction to a delay in raising rates shows how addicted markets are to free money. It’s more not less concerning in the context of the Fed eventually taking away the free money punch bowl.

For mine it looks like on currency markets at least a little more US dollar weakness is on the cards in the days/weeks ahead.

Even with the above short term overbought/sold nature of the market the fact that the US dollar selling was relentless from the moment the market caught sight of the FOMC minutes is a signal of market skew on which futher moves can feed. This morning the Aussie dollar is more than a cent higher now at 0.8845, Euro rallied almost as much to sit at 1.2738 and the Yen is at 108.12. GBPUSD rallied 1.3 cents to 1.6177 this morning.

Looking at stocks at the close the Dow was up 275 points or 1.64% to 16,994. The Nasdaq rose 1.91% to 4,469. The S&P was up 34 points or 1.75% to 1,969.

Europe of course missed the action as the market was closed so it’s hardly worth noting the falls on the continent. The DAX dropped 1%, the CAC 0.98% and the FTSE was 0.21% lower. Unless something goes haywire in Asian trade today expect Europe to open sharply higher.

Australian investors and stock traders will have a more pleasant day today – as long as we don’t get another rogue employment number – with the December SPI 200 futures up a stellar 57 points to 5282. The rally might have more legs in it yet.

On commodity markets crude fell 1.35% to $87.35 a barrel after a big build of stocks was announced overnight by the EIA. Iron ore fell heavily as well down $1.70 a tonne for the December futures to $77.35 whie Newcastle coal for December rose 20 cents to $66.60 a tonne. Gold is up to $1,223 but seriously lagging while copper remains calm at $3.03 a pound. On the Ags wheat rose marginally up 0.36%, corn was 0.65% higher and soybeans fell 0.74%.

On the data front today the new and improved, perhaps – maybe not, non-seasonally adjusted employment data for Australia will be released today with the market looking for a solid gain of around 20,000. Westpac consumer confidence is also out and then tonight we see the release of German trade data a Boe interest rate decision and jobless claims in the US.

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