It truly was the most important announcement of the year so far and while the FOMC didn’t divert at all, except for one small wrinkle I will talk about below, from the script I expected markets have still reacted as though we saw some fresh news last night.
US 10 years are up a shocking 17 basis points to 2.36% which is just carnage in the bond market in terms of capital loss, the US stock markets were all down more than 1% and the US dollar absolutely drove all before it as the Euro, Yen and Pound got hammered but that ias nothing compared to the carnage for the Aussie dollar bulls as it is the only Major traded currency that has not, at any stage recovered since 4am this morning.
Bill Gross from Pimco said on Bloomberg this morning that “Bernanke is driving in a fog” which I think is way too harsh on the Fed Chairman and belies the fact that about a minute before he also said that the market had missed the important nuance in the FOMC statement about the inflation rate as they focused on the economy, employment and when the super low rates policy might end.
Indeed I thought Bernanke and the FOMC did a very good job of communicating the fact they see the economy recovering, what the triggers, no not triggers he made that plain in the news conference but preconditions, for a change in policy and for a move in interest rates. That being still the unemployment rate which the Fed revised to a forecast range of 6.5% to 6.8%, down from a previous range of 6.7% to 7.0% for 2014.
In the news conference he effectively said the markets were on their own in figuring out what to do and suggested volatility was because the market had got a bit ahead of itself in implying QEinfinity noting that in the past if rates had been cut 25 bps when some market players were expecting 50 they should see this as a tightening in conditions. So he thumbed his nose as those who think tapering talk is too early.
He was however even handed insofar that he said if the economy was to slow the Fed could ratchet up again but like the last time he said that the market didn’t listen which says to me that the Fed is doing the right thing in intervening in the markets QE Drug habit.
As a result of the FOMC communique and the presser stocks in the US were off sharply with the Dow down 206 points finishing on its lows at 15112, the Nasdaq was down 1.13% and the S&P 500 also fell 1.38% closing on its lows at 1629.
As you can see in the S&P chart above all we have so far is a pullback and it remains my base case that only a move down and through 1590/93 would open up substantial downside
Aussie Falls hard
Have you ever made 8% on your account in a day and been disappointed?
Well I am here to tell you that my inherent conservatism got in the way of me turning a double, perhaps even a triple into a home run this morning. I was short into the FOMC announcement but I awoke, LATE, at 4.10 to find that my short had been stopped overnight on the run to 0.9554 and the Aussie was a full 100 points lower. I sucked it up and went short again but closed out at 0.9400 as Bernanke started his Presser and then sold again as the Aussie rallied before it crashed under 94 cents. But even then as it approached last weeks low I took profit and here I sit without a position and I reckon a score of about 6 out of 10 for trading and the only reason I give my self more than 5 is because I made a profit.
Anyway the key point here is that the Aussie, unlike the Euro, Yen or Pound is alone among the Big 4 traded currencies not to have staged any sort of decent recovery, not even for an hour, since 4am this morning although at 7.34 and from a 0.9281 low it is trying.
The monthly chart above puts the Aussie’s fall in context – it is huge but it is still very high relative to history and if the USD is going to strengthen as I believe it is, as the interest rate spread contracts as it is presently and as the mining boom fades and investor sentiment toward the Aussie falls then the risk is that the Aussie Dollar cascades over the waterfall like it did back in 2008. maybe not 0.5960 but certainly low 80 cent region over the next 6 months.
Worth noting though and as I noted in my weekly Free Subscriber newsletter if everyone is calling the Aussie higher in the short term, as they were late last week but still have lower forecasts in the out months then in my experience they are talking their book and want it to rally so they can sell it.
What does that mean? It means for all the focus on the big spec shorts there remains a lot, a huge amount, of real money physical selling that is just going to be dying for a rally to sell. The overhang just got worse.
On other FX markets the Euro was poll axed from 4am and sits at 1.3294 today down more than 120 points. I don’t like the hubris associated with saying I told you so because I felt the icarun sun myself from time to time but the technical set up for Euro and GBP were almost perfect yesterday and the Pound is down at 1.5481 this morning of almost 200 points. I expect both to fall heavily, many big figures, in the weeks ahead.
The Yen was sold as well and sits at 96.38 this morning. I thought it might have gone a little further and it actually traded up to 97.01 at one stage a couple of hours ago. I thought of buying some as it retreated from this level and was sitting at 96.65/70 but thankfully I didn’t because it fell back below 96 which would have been an ugly loss. As it stands now 95.80/96.00 remains key support but the dailies suggest a move toward 98.75.
I have done an FX Outlook for subscribers for the 2nd half of 2013 which is available on the website and you should have an email with the password. Anyone else can gain access by subscribing and I will send you the password. Remember I will not ever sell or share your email address with anyone except me.
Gold is at $1350 and I think at risk of the next leg lower toward $1200, perhaps lower. Crude remains ambivalent to the ructions in FX and equities sitting around $98 Bbl and Dr Copper is only off 0.43%.
Who cares really what data is released today? Traders, Investors and Investment committees all over the world are going to be sitting down trying to figure out what the Taper really means for asset markets now that we pretty much know it is coming.
But in New Zealand we see GDP and then we see HSBC Chinese Manufacturing PMI and a raft of Manufacturing PMI’s in Europe, retail sales in Britain and then Jobless Claims and PMI in the US.
Reminds me of a Thompson Twins song from 1984 – No peace for the wicked