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To see an expanded version, right-click and select ‘open link in new tab‘. The indices show the performance of a currency vs a G8 FX basket.
The time has come to start fully shifting the focus away from any second-tier events and be locked and loaded for the real fireworks in the form of the FOMC outcome (4.30 AEST), including both the Fed statement as well as Fed’s Chairman Powell press conference. Will the Fed continue to deliver on the ultra-dovish expectations in line with its new regime of AIT (Average Inflation Targeting) policies?
Volatility in FX, while awaiting the real risk event in the US afternoon, was quite decent, especially in the likes of the Oceanic currencies. Both the AUD and NZD strengthened, spurred by better Chinese data where there is finally evidence that consumers are coming back. Besides, risk-on in stocks and the revelations as part of the RBA minutes that the Central Bank is in no hurry to alter its monetary policy settings in the near term also were a major contributor.
The RBA Board Minutes repeated the easing bias from the September meeting with no further hints on what may come next. The Minutes did stick to the same dovish line from previous meetings noting that “the Board continues to consider how further monetary measures could support the recovery”. On the AUD, slightly more dovish remarks were made, noting “broadly aligned with its fundamentals” but “a lower exchange rate would provide more assistance…”
What’s also been quite noticeable this week has been the buy-side flows in the Japanese Yen non-withstanding the reversal in risk dynamics to a more constructive environment. This improved mood, as a reminder, continues to be rather oblivious to the fact that in the US there continues to be lack of progress on another US fiscal package as political games/brinkmanship is at its peak ahead of the election.
Which takes us to the next key question. Will the Fed fell obliged to fill the void amid the unwillingness of politicians to agree on the fiscal side? Or will the Fed prefer to hold off any renewed commitment on further QE by first letting the storm (election) pass and being in a position to make better informed decisions after that? That’s why the forward guidance will be absolutely critical this time.
The recent adoption of a new regime whereby the Fed proactively seeks a sustainable boost in inflation makes this a key meeting where Powell needs to clarify what this will mean for the balance sheet and the rates outlook going forward. The reaction in the USD will be a by-product of the behavior we’ll see in inflation expectations (breakevens) and ‘real’ Treasury yields, the main barometers for equities, Gold, and the Dollar to take a directional gauge from.
Amid this new new monetary policy regime they set out last month called ‘Average Inflation Targeting’ (AIT), the Fed must remain credible so they need to inform the market how that will be achieved and massage the message in a way that doesn’t disappoint. As I mentioned in my previous notes, if the Fed hints at more expansionary policies to keep expanding its balance sheet, there are real risk of a lower USD. However, if they fail to properly communicate their plan of action, the more combatant stance seen in the USD as of late may continue. Either way, volatility will see a major spike.
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In this video analysis I dissect the information above. Ultimately, it is the traders’ call, via a set of entries thoroughly backtested, to enter and manage a position, hence the video is intended as educational in nature and not financial advice.
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