It is a difficult one this morning because the US stock market is closed but Fed Chairman Ben Bernanke is speaking and FX rates are all over the place. He has just talk about the headwinds to the economy and the Aussie, Euro and GBP are up more than 100+ points each. These moves make a lot of sense given the taper has been an important driver of rates in FX and thinking about rates in FX and also given that the Fed minutes last night seemed to point to the taper but highlighted the risks from employment just as Bernanke did now.
In other markets the Dow and S&P were up a little but basically unchanged, Europe was under pressure and Gold was up 1% to $1258 but the big mover on the night was Crude which saw another huge draw of almost 10 million barrels after last weeks 10 million draw and it spiked 2.4% to $106 Bbl – the world can not afford crude at this level.
Fed minutes a little surprising
I am confused.
In the age of Central Banker transparency and after a concerted effort for a number of Fed speakers to get out on the hustings after the last Fed meeting and Bernankes empowerment by his colleagues to warn of the taper that the minutes to that meeting that were released this morning read so confusingly.
A few members this, a member that, some members something else – it was all a bit weird really. As Zerohedge said this morning,
The Fed may have finally taken speaking out of all sides of its mouth a step too far
I have read the minutes front to back though and although I have my bias that the Fed has been telling us they are going to taper I think that the last paragraph of the minutes tells us this is still true.
While recognizing the improvement in a number of indicators of economic activity and labor market conditions since the fall, many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases. Some added that they would, as well, need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases…
several members judged that a reduction in asset purchases would likely soon be warranted, in light of the cumulative decline in unemployment since the September meeting and ongoing increases in private payrolls, which had increased their confidence in the outlook for sustained improvement in labor market conditions.
BUT CRUCIALLY FOR THE LONG TERM OUTLOOK FOR RATES
Many members indicated that decisions about the pace and composition of asset purchases were distinct from decisions about the appropriate level of the federal funds rate, which would continue to be guided by the thresholds in the Committee’s statement.
I still think the initial reaction and words of the Fed officials in the immediate aftermath of that meeting and I also believe that last week’s solid rise of 195,000 in non-farm payrolls plus the stock markets new flirt with all time highs will drive the run toward taper in September – there might just be a few market players surprised.
FX volatility rises on the back of the minutes
There is a lot of confusion and different views about what the minutes mean on the Punditry but there appears little doubt in FX land that the outlook is now more cloud than a simple march toward the taper if the moves this morning are anything to go one. as discussed above the US dollar has weakened against the Euro, Pound and Aussie in a material way since the minutes and then again as Bernanke focussed on the risks to growth.
The Euro was already rallying from the recent lows and was at 1.2842 afew hours ago but sits at 1.3017 now. Sterling is also up at 1.5052 from 1.4907 a few hours back and the Aussie is 0.9227 off a low of 0.9091 a few hours back. It is all very messy with the Aussie having traded through about a 130 point range twice in the past few hours which is very destructive price action.
I made about 120 odd points yesterday trading the Aussie from the short side mostly based on the hourly charts. You can see the levels of the past few days in the chart above. what you can also see is that there is quite a bit of clear air on the topside if this rally wants to get a wriggle on but just like yesterday at some point today I will be happy to go short above 92 cents again but with a caveat of only while it is below 0.9237 (high just now).
The Euro looks a good sell while below 1.3035 and Sterling while below 1.5062. But a word of warning – Mandlebrot warns us that volatility begets volatility so this is not a time for positioning heroics or forgetting one’s stops.
Oil and Gold higher
As noted above Nymex crude is at levels not seen for the best part of 18 months but equally as you can see above there is some overhead resistance. The rally is fundamentally based in some very solid draws over the past 2 weeks of an average of 10 million Bbls.
Gold is up at $1263 on the back of USD weakness as well.
Today sees Kiwi PMI data, Japanese foreign investment, machinery orders and BoJ monetary policy and employment in Australia. German wholesale prices, French CPI, the ECB monthly report and US export and import prices together with initial jobless claims.