Thoughts from the Trading Trenches
13 Years ago | November 01, 2014 9/29/23, 12:00 AM
In the November Issue
Did the Fed Give a Green Light to Buy Dollars?
Video: Forex Trading Outlook for November
Did the Fed Give a Green Light to Buy Dollars?
As I have noted many times, markets move when there is a surprise. The October 29 FOMC statement produced such a surprise, not so much that it was hawkish but from the fact that is was less dovish. This hit a market positioned for the usual dovish FOMC statement and sent the dollar sharply higher as it reversed pre-FOMC weakness.
Rate Expectations Drive Trading
As I have been also noting this year, the forex (and other markets) continue to be driven by Fed rate hike expectations. In this regard, I saw a respected economist (before the FOMC statement) call for no rate changes by the Fed in 2015 and he was not alone in his view that interest rates would rise later rather than sooner. The FOMC statement has forced a reassessment of when the Fed might start to raise interest rates as a sooner rather than is being priced in. This also refocuses the market on diverging monetary policies with central banks, such as the ECB and BoJ pointing one way (i.e. easing) and the Fed (and the Bank of England although GBPUSD fell as well) looking the other way (i.e. tightening).This is why one could say the Fed gave a green light signal to buy dollars.
Data Dependent Trading
In any case, this should leave the market data dependent with the focus mainly on U.S. economic reports as they will guide expectations of when the Fed may start to raise rates. This, in turn, will drive the forex and other markets. Key areas to watch remain the labor market (including wages) and inflation (Fed will likely look past the drop in energy prices as it looks for any signs of tightness in the labor market). What this suggests is a data roller coaster ride where it would take surprises on the downside vs. consensus forecasts for U.S. economic reports to derail the current outlook for interest rates and the revived risk on the dollar upside. With that said, the FX market rarely moves in a straight line and why I said to expect a roller coaster ride. In this regard, watch the reaction in U.S. bonds to data as a move higher in yields would probably be needed to accelerate the dollar upside.
Addendum: The BoJ Flashes a Green Light to Sell Yen
In yet another surprise, the Bank of Japan shocked markets at month end by easing monetary policy and this sent the JPY tumbling across-the-board. Coming on the heels of the less dovish FOMC statement plus the end of Fed bond buying for QE3, it further highlighted the monetary policy divergence between Japan and the U.S. While not explicitly mentioning the JPY, the additional BoJ easing (increase in annual asset purchases by Y30tln to Y80Tln plus the tripling buying of ETFs and REITs), sent a strong signal to sell the currency. In addition, as expected, the Government Pension Investment Fund (GPIF, world’s largest pension fund) increased the allocation to foreign stocks from 12% to 25% and foreign bond holdings from 11% to 15%. This sets the stage for a weaker JPY and moves it to the top as the favored funding currency for carry trades.Government Pension Investment Fund (GPIF, the world's largest pension)
This is from my 21 Forex Trading Tips and is applicable to the renewed weakness in the JPY.
Path of Least Resistance
Markets are like a river flowing downstream constantly looking for the path of least resistance. When if finds a clear path the pace of flow accelerates. This is a way to look at trading and an example would be the way the JPY was sold vs. the dollar and on its crosses at various times during this past year (i.e. 2013) and the EUR sold after mid-year in 2014 as fundamentals supported the technicals.
See the following article for my month ahead forex outlook video update.
Jay Meisler, founder
Global Traders Association
Video: Forex Trading Outlook for November
