Market reactions depend less on the hawkish/dovish inclinations of central bankers and more on whether officials are in tune with signals from markets. The yen was the top performer as USD/JPY fell to 113.10; the Canadian dollar lagged. Expect quiet trading in Asia with China and Japan both on holiday.
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There is no doubt that the past six months have been a damaging time for central bank credibility. A virtually unanimous chorus of monetary policy leaders proclaimed a brighter future, rate hikes and rising inflation. It culminated in the Federal Reserve hiking rates and hinting at four more rate rises to come.
The Fed didn't see trouble coming and its inability to identify problems aside from pointing to 'unease about China' is worrisome. A doctor can't cure a patient if he can't diagnose the problem. Even worse if he doesn't recognize a problem at all.
The first day of Yellen's two-day Congressional testimony showed a paradigm shift in market reactions. The dollar first rallied when she was less dovish than market watchers anticipated. That's the normal reaction. But later the dollar dropped sharply as Yellen expressed a dogmatic attachment to economic data and no urgency to tackle or even understand why markets are signalling trouble.
The shift in market psychology makes sense. Fed funds futures are no longer pricing in Fed rate hikes in 2016. Before any central bank hikes, it will need to re-establish market confidence.
The inability of officials to get a firm handle on the commodity crisis is what's helping to underpin safe havens like bonds and gold. It's also adding currency volatility and shaking out US dollar longs. Until something changes, the trade remains the same.
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.
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