Market was caught off guard by hawkish FOMC minutes

Market was caught off guard by hawkish minutes from the 27 April FOMC meeting and is all of a sudden reassessing its views on US monetary policy.

Following the release of the minutes, as the committee expressed support for a possible (data dependent) hike in June, the market implied-odds of a June hike jumped from roughly 15% to 35%; the odds stood at just 7.4% two-days ago before a number of hawkish Fed speakers.

This doesn't change the call for a September hike, but steers the market away—at least for now—from overly dovish US rate expectations that have largely dominated over other themes this year. This also means that the great support that EM assets have received since after the January selloff—which may not be entirely due to, but definitely is rooted in such implied odds—may start to falter, in the same way as oil prices are immediately feeling the heat of a stronger dollar.

European currency markets are trailing behind with the high yielders (TRY, ZAR and RUB) skewed towards weakness vs the CEE currencies flat or slightly positive. It’s still too early to say which direction may prevail, but we suspect that correlations with equities will continue to hold, and stock markets are currently in the red. So if the equity slump advances, there will be little in the way of further EM FX corrections. This is in line with our medium term view, but doesn’t reconcile with our more optimistic short-term one that is based on the assumption that the market would remain dovish on implied US rate expectations until the end of Q2.

If  wrong on this assumption, however,the majority of EM FX are recovering rapidly bridging the gap between short term and medium term forecasts; in other words, we could see  Q3/Q4 forecasts materializing a lot faster than we thought.

Australia's Central Bank Cuts Key Rate to 1.75% to Combat Disinflation

Australia’s central bank cut interest rates to a fresh record low as it moves to counter the emergence of disinflation that’s swept the developed world and limit currency gains that could complicate an economic transition.

Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.75 percent Tuesday, as predicted by 12 of 27 economists surveyed. Data last week showed quarterly deflation in the consumer price index and the weakest annual gain on record for core inflation -- which the RBA aims to keep between 2 percent and 3 percent on average.

“Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens said in his statement. “These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

The currency has risen as much as 15 percent since mid-January and is likely to further restrain import prices in Australia. The resurgent Aussie also casts doubt on the sustainability of both the Australian labor market’s improvement and the burgeoning tourism and education industries that led a 1 percentage point of gross domestic product turnaround in services exports. 

Aussie Plunges

The Australian dollar fell after the decision, trading at 75.66 U.S. cents as of 3 p.m. in Sydney, from as high as 77.19 cents earlier in the day.

The RBA has also been monitoring the impact of tighter regulations on home loans as residential prices in Sydney and Melbourne surged on easy policy.

“In reaching today’s decision, the board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate,” Stevens said. “At present, the potential risks of lower interest rates in this area are less than they were a year ago.”
 
Global policy is diverging and creating cross-currents as Europe and Japan move to negative rates and the U.S. tightens policy. That, together with a resurgent price for Australia’s biggest export, iron ore, has helped lift the Aussie dollar. 

Iron Ore Rebound

The RBA reiterated that “an appreciating exchange rate could complicate” the economy’s transition. It also noted the rebound in the iron ore price in response to policy easing in China, Australia’s biggest trading partner.

“Commodity prices have firmed noticeably from recent lows, but this follows very substantial declines over the past couple of years,” Stevens said. “Australia’s terms of trade remain much lower than they had been in recent years.”

He also noted that China’s growth rate “moderated further” in the first part of the year. 

Stevens was upbeat on Australia’s growth after the economy expanded 3 percent last year. “Indications are that growth is continuing in 2016, though probably at a more moderate pace,” he said. “Labor market indicators have been more mixed of late.”

Fed’s slipped up by delaying rate hikes. Here’s why

The U.S. Federal Reserve has made a "policy mistake" by holding back further rate hikes in 2016 as the U.S. economy is growing strongly and a hawkish monetary policy is therefore needed, according to a report by London-based ETF Securities.
The Fed passed on raising its interest rate target at its March meeting this year citing global economic and financial situation as a risk. Policymakers had previously signaled in December that four rate rises were likely in 2016.
However, the report from ETF securities suggests the lack of hike in March was an error in judgment from the US policymakers. It seems like the Fed's board of governors has become more dovish since the December meeting and the market is now pricing in only one rate hike by the end of the year.
ETF Securities, however, believes the Fed has slipped up.
"Real GDP (gross domestic product) trends indicate that the pace of U.S. economic growth is solid. While the growth path of real GDP is not as strong as pre-crisis levels, there is no evidence of a slowdown. Such a growth path warrants tighter monetary policy," ETF securities said in a statement.

ETF Securities' stance is, however, contrary to what a number of economists believe. Official data shows the U.S. economic growth slowed to 1.4 per cent in the fourth quarter of 2015, down from 2 per cent in the third quarter of 2015. A number of banks have already revised their outlook for the year due to factors such as global economic uncertainties.
Citigroup, for example, recently downgraded its outlook for the U.S. for 2016-2017, saying the risks were very evident. The revised figures show that the GDP will grow by 0.9 percent in the first quarter and 1.7 percent for the year. "Despite such tepid growth prospects, we project a slow decline in the unemployment rate to 4.7 percent by end-2016, and 4.5 percent by end-2017," William Lee, head of North America economics at Citigroup said in his research outlook. He predicted inflation to remain subdued.
However, James Butterfill, head of research and investment strategy at ETF Securities says while the Fed is currently stuck in a liquidity trap, the U.S. economy is strong to sustain another rate hike.
"Looking at the key factors that have historically defined rates hikes, namely the non-accelerating inflation rate of unemployment (NAIRU), wage growth and nonfarm payrolls, all suggest a rate hike should occur. Delaying hikes will likely have a much more negative impact on asset classes and the global economy," Butterfill told CNBC
He further explains that current real GDP has recovered and the quarterly dip in the figures is very common during rate hike periods.
"Investors and industry leaders become very concerned with the impact that the first rate hike will have on the economy – a short term negative fund. This in turn leads to lower corporate confidence and consumer confidence, leading to a temporary dip in GDP growth, this is history repeating itself."


The report also says that currency volatility remains elevated as investors continue to worry over the potential for rate hikes derailing the U.S. economic recovery. However, the ETF Securities report says there is no danger of modest rate hikes impacting economic growth with the threat actually coming from uncertain policy guidance from the Fed.
"Such a situation seems circular, with markets fretting over Fed decisions and the Fed concerning themselves with market volatility – an issue outside the scope of its mandate," the report says, predicting that the U.S. recovery will continue in 2016.
The minutes of the March meeting highlighted the consensus within the Fed around a cautious outlook for the economy.
"If the Fed's global concerns diminish in the near term, their worries about the U.S. economy should also lessen," David Kelly, chief global strategist at JP Morgan Asset Management told CNBC via email. "The U.S. economy, like the global economy, faces challenges ranging from a very volatile and unpredictable race for president to uncertainty about the strength of any potential bounce-back in corporate earnings. Moreover, equity valuations look close to fair value rather than cheap in absolute terms. "

This is what could create some turbulence Friday

  Fed officials from different camps speak ahead of Friday's Wall Street open, and they could make some waves in already seasick markets.

Market nerves are starting to get a little frayed right now. You can see it in the risk markets  there's potential (for market impact). What's been interesting to me is you've had a parade of Fed officials some of whom are extremely dovish, and they've been a whole lot less pessimistic and a lot less dovish than (Fed Chair) Janet Yellen, since the last meeting."

Speaking on Friday is New York Fed President William Dudley, who is seen as closely aligned with Yellen — in the dove camp. He speaks at 8:30 a.m. EDT on the regional and national economy in Connecticut. Philadelphia Fed President Patrick Harker gives remarks at an investment conference in Camden, New Jersey, at 9 a.m. EDT, and he has recently called for the central bank to get on with rate hikes. Dallas Fed President Rob Kaplan speaks later on the political economy of Texas and Mexico at 9:30 a.m. EDT.

Unfortunately they seem in muddled message mode right now,. Markets will also digest the comments of more hawkish Kansas City Fed President Esther George, who was to speak Thursday evening. George is the one member who dissented at the last central bank meeting, when it voted to keep rates unchanged.

There will also be comments to consider from Yellen herself, plus her last three predecessors, at an unprecedented panel discussion Thursday evening. 

Yellen said Thursday that the U.S. economy is strong and said it is not a bubble economy. She reiterated that the Fed is taking a cautious approach on raising rates and said the Fed's rate hike in December was not a mistake.

Her comments Thursday evening were viewed as more optimistic than in her appearance last week, and they helped support risk markets, including oil. Now the question is which way will the next speakers lean

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Brexit: GBP COULD FALL A FURTHER 15-20% vs USD

A Brexit vote could lead investors to worry about the UK’s ‘twin deficits’. To date, these have largely been ignored by the FX market. Brexit could raise concerns and Mark Carney, the BoE Governor, recently warned that Brexit could leave the UK reliant on “the kindness of strangers” in an environment of global economic volatility.

Already a gap has opened up between the observed level of sterling and the level implied by interest rate differentials. If the currency market is pricing in around a 33% probability of a Brexit vote, GBP-USD could fall by around another 15-20% should a Brexit vote occur (i.e. if the probability shifted from 33% to 100%). This would see GBP-USD falling to levels not witnessed since the early 1980s. We also think that the GBP would come under pressure against the EUR. Indeed, EUR-GBP could move towards parity in the aftermath of a Brexit vote.”

WELCOME BACK

Hello dear,It is my sincere pleasure to welcome you back to our darling blog website,doing what we always enjoy .My sincere apologies for the long absence, I know readers and well wishers would have missed my post a great deal.As  Business Entrepreneur,I have been busy working on some vital projects,but notwithstanding my love,determination and doggedness trading the capital market,sharing and networking,remains unwavered and I am absolutely committed to contributing my own quota in trading experience geared towards making consistent profits and at the same time reducing flaws to the barest minimum.

I strongly believe nothing is impossible to the mind that is ready to take the desired action,and you can achieve anything you want to be in life as far as trading is concern ,we will definitely all get to our various destinations and even surpassing our dreams,visions,and aspirations.The sky is just the starting point.See you on top,enjoy reading…..

CALENDER OF KEY EVENTS FOR JANUARY,IN THE EURO ZONE

As the euro approaches its 10th anniversary – fighting for survival – France will start the year with its first debt auction.

5: France will kick off a mad dash to financial markets by eurozone governments: Italy alone needs to raise €450bn (£375bn) in the next twelve months. France's first debt auction of the year comes as Paris anxiously awaits a long-expected credit downgrade.

• 6: The US releases its key monthly unemployment report for December, the non-farm payroll. A strong reading would underpin confidence; a weak one could create panic.

• 8: The deadline set by the new Spanish government has for deciding a package of labour market reforms as the latest part of Madrid's attempt to show investors it is serious about kick-starting its economy.

• 9: Germany will try to borrow €4bn from the financial markets in short-term loans. It will be watched closely as a measure of investors' confidence in the Euro after a failed auction in November.

• 11: Germany will be back to the markets, trying to sell €4bn-worth of 5 year Bunds, or government bonds, on the same day that the government reveals official GDP figures. A decline could point to the onset of eurozone-wide recession.

• 12: Italy auctions short-term bonds. Technocratic prime minister Mario Monti will hope to repeat last month's stunt of appearing before a chart of declining Italian bond yields.

Senior officials from europe will start a two-day meeting in Copenhagen; the Americans will no doubt repeat Washington's demand that eurozone leaders resolve the crisis.

Official figures will show what happened to industrial production in November in the UK and the eurozone.

The Bank of England will decide whether to increase its quantitative easing programme.

• 13: Italy will be back in the markets, to borrow money over 5 years.

• 16: Inspectors from the European Commission, the IMF and the ECB(Troika) will return to Greece to assess its progress towards resolving its debt crisis. Rumours are emerging to suggest they could recommend an even bigger debt writeoff.

• 17: Spain will be raising short-term debt, over a period of 12 and 18 months, while in Germany the key monthly survey from thinktank the ZEW will test the country's economic strength at the turn of the year.

• 18: Germany will be back in the markets to auction €4bn-worth in 2 year notes.

• 19: Two-day meeting of deputy finance ministers from G20 countries in Mexico City, giving eurozone governments another chance to urge developing countries such as China – and non-members such as the UK – to contribute extra resources to the IMF that could be used in the event of a euro meltdown.

Meanwhile back in Madrid, Spain will be auctioning (more) bonds.

• 20: Germany's turn – it will auction €3bn in 1 year bills, known as Bub ills.

Relief for Athens - or perhaps not - as the Troika inspectors depart.

Retail figures for the UK will give the official picture of Christmas shopping trends.

• 23: Finance ministers from euro zone member-countries will meet to hammer out the next steps in the battle to stabilize the currency; while Monti is scheduled to outline yet more austerity measures.

• 24: Spain auctions 3 and 6 month bills Eurozone ministers will be joined by their counterparts from non-members of the single currency – including George Osborne – to discuss the crisis.

•25: Germany will auction €3bn in 30 year bonds, while the ECB will offer the next batch of emergency loans to banks in its so-called long-term refinancing operation.

Official GDP figures from the UK will be released, revealing whether the economy contracted at the end of 2011.

• 26 and 27: Italy auctions (yet) more bonds as US GDP figures for the end of 2011 are released.

• 30: Italy is at it again, this time selling 3 and 10 year bonds, against the background of a major summit for European leaders, at which they hope to make progress towards shoring up their bailout fund and tightening tax and spending rules.

• 31: The troika is due to deliver its report on Greece and talks with the country's private creditors, under which Athens hopes they will volunteer to accept a hefty write down on the value of their bonds, are due to end.

To Your success

Fxtycoon....

Stevens Adeola,S.