US Dollar: Rally or Collapse Depends on FOMCs Risk
WASHINGTON (Sept 18) We have finally reached one of the most talked-about event risks in months, and expectations for its impact range from ‘non-event’ to explosive volatility. One thing that traders should appreciate: regardless of immediate volatility, this event will have trend implications. The September Federal Open Market Committee (FOMC) meeting has been pegged as the policy gathering at which the central bank would embark on its effort to rein in its expansive stimulus program – now commonly referred to as the Taper – since Chairman Bernanke laid out a time frame back in June. In the press conference that followed the
Simple deduction has led the market to its consensus that the first move to moderate would come today. Considering the policy authority wants to progress at a moderate pace in its wind down to mid-2014, that Bernanke is expected to retire in January and the best opportunity to ‘explain’ the move comes during the quarterly meetings (the next is December); September ultimately seems the most reasonable time for a move. As an alternative scenario, though, no Taper would trigger a considerable backtrack on months of adjustment that would be felt most fully in Treasuries and the dollar. The current debate no revolves around how large the cut will be and the pace thereafter.
While there are contradictory reads on what the market expects between an 85 percent rally in 10-year Treasury yields and record highs for US equity markets, expectations are likely to mirror the consensus amongst economists. According to Bloomberg’s poll of the group, the central bank is prepared to lower its monthly dip by
While the first Taper is absorbed and the market gains a clearer view of the central bank’s future pace of policy, the focus for traders looking for the heaviest market impact must be on this event’s influence over risk trends. While we have seen the market’s effort to discount the stimulus turn range from extreme (with Treasuries) to more modest (as with the dollar), the benchmark for risk appetite – the S&P 500 – has defied correction. For a market built on record amounts of leverage, a cooling economic backdrop and flimsy investor participations; this important barometer is extremely exposed. Conditions are ideal for a deleveraging that exposes the broader financial system to risk aversion. It is important to recognize that the initial reaction may be blurred and volatility stunted, but don’t underestimate its implications.
British Pound will US BoE Minutes to Compare
According to the August CPI figures, inflation pressures have cooled in the