Forex Stocks, CFD and Futures
Trading in today’s London Session has indicated that market participants are uncertain how to react to yesterday’s dramatic US Fed rate decision and commentary. Currencies have dealt all over the charts in sporadic, “non-committal” price action. Volume has been light, exaggerating the movement, which is likely due to the holiday season and the fact that the year-end is in sight. Economic data results out of the UK have not affected the market, nor has there been any global news. In short, rates are fairly close to pre-London levels as New York traders enter.
Yesterday, the FOMC clearly failed to appease global markets in its decision to cut the benchmark rates by only -0.25%. Conventional wisdom would have said that London traders should enter with the expectation that the “risk” aspect of the FX market would be under pressure. This would have likely entailed a lower EURJPY along with slides in the high-yielding currencies (the Aussie and New Zealand dollars). To the contrary, these representatives of risk in the FX market had fully digested Wall Street’s extensive losses by the NY close. By the time the Asia Session opened, these currencies were rebounding. Also, the Fed issued additional commentary, stating that necessary actions would be taken on an as-needed basis. Traders interpreted these statements as dovish, opening up the doors to further easing. As mentioned above, the bulk of price movement came in the Asia Session and London failed to make notable progress in either direction.
From here, New York traders will search for further indications as to the future of the Fed’s rate decisions. The most available information comes via economic data, so we expect the inflation numbers (PPI and CPI) coming both tomorrow and Friday to be watched carefully.
A tone of disappointment has swept the market after the Fed cut rates but not as much as many hoped. Bernanke & Co lowered the federal funds and discount rate by 25 basis points but the market had priced in some expectation of 50 basis points. Equity markets and JPY crosses sold off hard on the prospect that the Fed would need to cut rates later and that the current cut was not enough to avoid a US recession or save the credit markets.
In Asia markets consolidated the large move in NY. EUR/USD is finding sellers around the 1.4670 area while USD/JPY briefly traded above 111.00 but pulled back. EUR/JPY rallied off the NY lows but selling interest now sits in front of 163 area. Further consolidation sets the stage for a continuation move, possibly in the London/NY time zone.
Looking forward, the week has barely started and questions remain. Will the rout continue in equity markets and the JPY crosses? Will the USD benefit from a flight to qualify or will foreigners continue to look to diversify into other currencies? US Consumer and Producer Price Indices are also expected. If inflation starts to tick up we could see the Fed in a bit of a conundrum as it balances inflation with the economy. In Asia the week ends with the critical Japanese Tankan report, a key indicator for that economy.
Ouch! That is the only thing that could be said if you were a JPY cross today. The risky trades were enjoying a nice ride higher since the end of November. The JPY crosses were cruising along nicely as were the equity markets. Then along came the Federal Reserve and its big stick. The FOMC decided today to lower the Fed Funds rate by 25 basis points to the 4.25% level much as the market had expected. However, the Fed lowered the Discount Rate by only 25 basis points to 4.75%. This was less than the market had been expecting. They also kept in the rhetoric in regards to inflation expectations by stating that inflation risks remained. The markets did not like what they saw or heard. They interpreted what the Fed said as somewhat more hawkish than expected. Risky trades got whacked. The equity markets dropped by more than 2% across the board. Carry trades in turn got hit just as hard. We saw most of the JPY carry trades get sold off between 2.5 and 3.25 JPY. The high yielding crosses such as GBPJPY, AUDJPY and NZDJPY took the hardest hits. GBPJPY ran down from the 228.10 area to the 224.80/90 area. AUDJPY fell from 99.40 down to the 96.25 area. NZDJPY took a hit from the 87.65 area down to the 85.35 area. These pairs took the largest hit as they are the riskiest of the carry trades.
One factor that really stuck it to the markets was that the Fed cut the Discount Rate by only 25 basis points. This was a huge disappointment for the markets. The market was hoping for larger cut of 50 basis and that the cut would alleviate some of the pressures in the credit markets. The Fed might be thinking that after the New Year the credit markets might ease up a bit. Perhaps the Fed knows something the market doesn't. It appears that the market is thinking the opposite. The sub-prime issue has brought on the credit market tightening up. Should we see further tightening of lending then we could see economic growth come to a standstill as businesses and individuals will not have access to cash for investments. Again we see that no growth will mean reduced risk taking. This will add to the woes of the risky trade and we may see more unwinding of the JPY crosses going into the year end.
Should the credit markets continue to shrink we could see more bad news out of the financial sectors. We could be in for more write downs and losses from the major global banks. It remains to be seen what happens but today's action by the Fed looks as if may be too little to help at the moment.