by Chris Becker
As the Asian session wanders into the pre-European open, the market news is starting to echo the positioning of the various institutions getting ready for the Fed’s FOMC meeting later tonight.
The overall trend is one of hawkishness – all eyes are on the Fed to continue its “tapering” of asset purchases – as futures continue to price tightening of the Feds stance at the end of 2015.
Goldman Sachs probably puts it best by suggesting recently:
“tactically, that makes us (GS) cautious going into tomorrow’s FOMC, while recognizing, however, that this view is finely balanced…. (as we remain) structural (US) dollar bulls”
GS have a short term tactical view of US dollar weakness, mainly because of the 2 year rate differential against other major currencies (ala Aussie battler) although it is falling:
“In the short term, the ability of the Dollar to strengthen meaningfully depends on the willingness of the Fed to let front-end rates move higher. Our assessment is that the Fed is not yet ready to let this happen”
But beyond that, mainly because of the recent change in ECB easing, as the longer term differentials – i.e. past the 2015 tightening cycle – start to bite, they expect EUR to fall:
For Aussie investors the question is how to struggle with these machinations – and the easy answer is tactically short Aussie dollar (long USD) with a view to being long on any surprising dovishness past 94.5 cents:
As markets are want to do, the short and long term case maybe settled by mere words, as Janet Yellen may follow her BOE counterpart, Mark Carney in explicit timing and direction.
Greg Gibbs, FX Strategist at RBS via FX Street:
“The Fed Chair’s press conference is the key vehicle through which the Fed has conveyed key details on policy direction. The communication strategy is that the conference is intended to convey the balance of opinion of the FOMC (not the personal opinion of the Chair, in this case Yellen).”
“Last year, Bernanke gave guidance on the timing of the Fed’s taper. Yellen may be compelled to begin to guide the market on the timing and pace of interest rate hikes, just as BoE Governor Carney did at his Mansion House speech last week.”
We await the sweet words of our wise central bankers.