8 Aug 2013
Flash: Fed-driven market - BMO
FXstreet.com (Barcelona) - Stephen Gallo, European Head of FX Strategy at BMO Financial Group said we’re beginning to see that this is a Fed-driven market even when the Fed has already managed to embed expectations, as it has now, regarding the ease with which it intends to start stimulus withdrawal later this year.
Key Quotes:
“From an foreign exchange market perspective, the current policy stance of the BoJ, ECB, BoE and RBA will only really pay off once the next leg of USD strength begins. On that basis, the Fed solely holds the key”.
“Although for the next 3 weeks we will have to account for the impact of summer trading conditions and positioning forces on FX pairs, we believe that key USD cross rates and their price action in favour of USD weakness have begun to lean and swing too far in the opposite direction of the Fed’s original May-June message on stimulus withdrawal”.
“European data have surprised to the upside as the Fed has moved to suppress short-term US interest rates, and this has seriously eroded the confidence of EUR/USD bears”. However, we believe that, if anything, upside US economic data surprises have generally kept up the pace with European ones, leaving open the possibility that FX market participants have begun to shrug off US dataflow with too much ease”.
“If the Fed can find a way to give US rates and the USD a little nudge higher without completely undoing its well understood intentions to keep rates low even after QE withdrawal begins, about now would appear to be the right time to execute. Anchoring for low rates outside of the US should have been successful enough to, for now, allow US rates to outperform their European and other G10 counterparts during periodic fixed income market sell offs. Failing this, we suspect summer conditions and FX positioning factors will continue to leave currency pairs in ranges which are drifting further and further away from reflecting the Fed’s true intentions. Major non-Fed central banks have probably exhausted all of their options at this stage”.
Key Quotes:
“From an foreign exchange market perspective, the current policy stance of the BoJ, ECB, BoE and RBA will only really pay off once the next leg of USD strength begins. On that basis, the Fed solely holds the key”.
“Although for the next 3 weeks we will have to account for the impact of summer trading conditions and positioning forces on FX pairs, we believe that key USD cross rates and their price action in favour of USD weakness have begun to lean and swing too far in the opposite direction of the Fed’s original May-June message on stimulus withdrawal”.
“European data have surprised to the upside as the Fed has moved to suppress short-term US interest rates, and this has seriously eroded the confidence of EUR/USD bears”. However, we believe that, if anything, upside US economic data surprises have generally kept up the pace with European ones, leaving open the possibility that FX market participants have begun to shrug off US dataflow with too much ease”.
“If the Fed can find a way to give US rates and the USD a little nudge higher without completely undoing its well understood intentions to keep rates low even after QE withdrawal begins, about now would appear to be the right time to execute. Anchoring for low rates outside of the US should have been successful enough to, for now, allow US rates to outperform their European and other G10 counterparts during periodic fixed income market sell offs. Failing this, we suspect summer conditions and FX positioning factors will continue to leave currency pairs in ranges which are drifting further and further away from reflecting the Fed’s true intentions. Major non-Fed central banks have probably exhausted all of their options at this stage”.