Fed Upbeat & Outsignalled

The short message from the FOMC was: “We like the economy but we're done making promises”. The dollar was whipsawed on the announcement; the euro was the top performer and yen lagged. A low-key Asia-Pacific calendar is ahead as the BoJ looms.

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The Fed said that near-term economic risks had diminished in its statement while adding that economy has been expanding at a moderate pace with better employment and continued strong consumer spending. Much of that was expected but the knee-jerk reaction only lasted a few minutes as the US dollar reversed more than a cent from its post-Fed highs.

Crowded USD longs is among the reasos of the pullback. A more fundamental reason was that the inflation assessment remained unchanged. And we already  know that despite employment, growth and consumer data remaining strong, the Fed will require unambiguousl evidence of a sustainable rise in inflation.

One thing that could certainly dim that view is oil. WTI crude fell another 2.4% Wednesday after a solid early gain was blown out by another surprise US inventory build. The drop in oil briefly sent USD/CAD to a four-month high.

Technically, crude has now cleared support at the May low and that points squarely to $40, which is another $1.89 below current levels. After five days of declines, it's a tough trade to chase but last year's drop showed that producers can get into a panic and begin selling to hedge en masse.

In terms of the Fed, the takeaway at the moment is that Yellen may feel reluctant to offer signals on rates. Officials have been repeatedly burned by forecasts that turned out to be wrong. The future playbook may involve less forewarning about plans and more allowing data to speak for itself. That will be important to keep in mind with a big week of data ahead.

In the short-term, all the focus is on the BoJ. In a surprise move, Abe revealed a 28T yen stimulus budget yesterday. The number was dropped in a quip to reporters and instantly sent USD/JPY 150 pips higher. It later retraced. In general, fiscal stimulus should be seen as good for a currency but in this case it might be a signal the BOJ is preparing something dazzling. Ashraf's Premium Insights continue to have 3 JPY positions.

But overall, the mixed and muddled BoJ expectations will make it a very tough central bank decision to trade. Today's reversal in the dollar could very well be a preview of what comes after Kuroda.