Jumping the shark

MISGUIDANCE - We have a serious credibility crisis over at the Fed. It has become increasingly difficult to rely on central bank guidance, with the Fed constantly wavering and sending mixed messages. At the previous meeting, there were comments from Fed officials that clearly leaned more to the hawkish side, with the direct implication that rates would be moving up sooner than markets had been pricing. And yet, Wednesday's Fed Minutes outlined a striking contrast, with members downplaying previous language and expressing concern that market participants had misconstrued the Fed's intent. The worst thing the Fed can do is send mixed messages and appear as though it lacks confidence and conviction. If the Fed wants to continue to lean on the ultra accommodative side of the fence (whatever you want to say about this strategy), at least it would be consistent with that mandate. But this has not been the case, and there has been far too much uncertainty and backpedalling that it is almost laughable. The direction in the global financial markets is heavily dependent on the moves over at the Fed, and in recent years (no denying this has been a very difficult and challenging time), Fed guidance has been nothing short of disappointing. First it was shifting the entire mandate over to the unemployment rate, then it was setting a specific rate as the catalyst for reversal, then it was saying that this rate was only a threshold and not a trigger, then it was entirely removing this threshold, and now, well now, I have no clue.

JUMPING THE SHARK - At this point, the best analogy I can make is the Fed with JJ Abrams and the creators of the series "Lost." While I could easily assign the title of the show as a comparison with the Fed, my analogy is more specifically associated with the fact that the show "Lost" got to a point where it "jumped the shark" because you had this feeling the shows creators had no idea where the plot was going and were flying by the seat of their pants. I hate to say it, but it feels like the Fed is also running around a bit like a chicken without a head. And so, the initial reaction to the Fed's dismissive attitude towards what had been quite obviously some recent hawkish sentiment (or much less dovish), was to crush the US Dollar, and buy back into equities. Rates aren't going up as soon as we thought so yield differentials have widened back out of the US Dollar's favor, and the free money incentive to buy risk assets is once again a screaming green light. But if we can no longer really rely on the Fed for consistency, why should market participants be so quick to react with such an aggressive USD sell/buy stocks mentality? The one critical point I will make is one that I have been making for some time now. When these types of Fed event risk surges in volatility occur, it is more important to pay attention to markets like USD/JPY and EUR/CHF than the rest of the currency market. USD/JPY and EUR/CHF both were still very well offered post Fed Minutes, despite the surge in other risk assets. And with these two markets standing out as some of the more reliable risk barometers in recent years, I would be recommend being very careful with a buying risk currency strategy. Moreover, perhaps one of the most under the radar highlights of the Fed Minutes was the expressed concern over the Chinese economy and worry of a slowdown. Kind of funny market participants are so quick to buy into risk on still ultra dovish policy, but are not afraid of that same strategy in the face of the threat of a China slowdown. Food for thought.