We guess that the market is not giving enough weight to Fed Pres Bullards’ comment that we could get a slower pace of Fed asset purchases, from $85 billion/month now to lesser amounts as data improves. The intrepid Market News fixed income reporter told us last week that the bond market psychology has already accepted that the end of easing is coming—now the rest of us need to change mind-sets, too. But, and this is critical, a tiny chink in the Fed’s policy armor must be taken in context, meaning not only the economic environment but also other central banks.
The BoE and RBA meet tomorrow and the ECB on Thursday. The BoE policy stance is forecast the remain the same this time but may be getting a shake-up if incoming chief Carney signals that he prefers a soft inflation band of 1-3% over the current BoE hard target of 2%. Carney also speaks of “escape velocity” and possibly using nominal GDP instead of infaltion as a target. He testifies to the UK Treasury Select Committee on Thursday. The Economist magazine likes the GDP idea and wants a 10% GDP rise to be the goal, even if accompanied by some inflation.
The Reserve Bank of Australia has long been rumored to be about to cut rates, with the current idea that it we could get 25 bp in Feb.
The ECB is unlikely to cut rates, although inflation is moderating and it could if it wanted to. But Draghi’s bias is for economic actors, inclduign governments, to stop depending on the central bank and to pullup their socks on reform. Some analysts reported by Market News say a combination of conditions could delvier a rate cut, possibly in Q2—-falling exports and other economic factors that are evidence the euro is too strong, say 1.4000 or more. Therefore, we need to listen carefully to Draghi’s press conference to hear whether Draghi is complaining about the level of the euro. It’s not Draghi’s style to complain and last time, it was Junker who complained. The FT’s Authers notes that with the US and Japan manipulating exchange rates, the eurozone could be the loser by refusing to take part in “currency wars.” We really dislike that word “manipulate.” It certainly seems to be an accurate description of what Japan is aiming for, but we feel confident that Bernanke is appalled at being accused of managing monetary policy for any reason other than to boost domestic economic activity. Greenspan has a new book on forecasting coming out soon and we shall see how he treats the dollar.
Until we have a firmer grip on central bank thinking, economic data will take on more importance than usual. In the US, today we get Dec factory orders and tomorrow, the ISM service sector index for Jan. Thursday brings Q4 productivity and Dec consumer credit, and Friday it’s the Dec trade deficit and wholesale inventories. Friday also brings the Jan China trade surplus, likely a drop to $28.5 billion from $31.6 billion in December.
Still, in the grand scheme of things, we are looking at a world in which the Fed may be less accomodative sometime soon, say Q2. if not actually hawkish, while the ECB could be becoming more dovish. The US won’t actually raise rates but the ECB could actually cut them, or at least complain about the euro, which boils down to the same thing for the FX market. The data has to cooperate. We need both conditions, a less dovish Fed plus satisfactory economic data (like last week’s auto sales). In the case of the euro, we need a more dovish ECB plus worsening economic conditions.
But scandal does have the capability to up-end the msot careful of economic scenarios. It’s possible that the Rajoy sitaution (and Berlusconi in Italy) can de-rail the already shaky tempprary truce between the bond gang and the sovereigns. We need to watch the periperhal yields and also whether the ECB steps in. Barely a few weeks into declaring the soveriegn debt crisis resolcved, here we go again. Flight to safety is dollar-favorable, of cours,e and postpones the rise in US 10-year yields that may otherwsie arise from a less-dovish Fed.
|SPOT||CURRENT POSITION||SIGNAL STRENGHT||OPEN DATE||OPEN RATE||POSITION GAIN/LOSS|
|USD/JPY||92.88||LONG USD||STRONG||10 /17/12||78.71||15.26%|
|EURO/JPY||126.00||LONG EURO||STRONG||11 /21/12||105.38||19.57%|