If you are a parent I am almost sure your kids have seen the movie “Frozen” a 100 times and know all the songs. The headline song “Let it go, let it go” i guess SAYS IT ALL after last night’s FED meeting. In other words let the USD go, let the USD go bla bla bla.
Before I get into the comments for today allow me to recap on yesterday’s blog and I quote: ” They ended their taper in October, but maintained their guidance of rates low for a considerable period of time, but in speeches several governors, and key personnel have hinted that, with the current pace of employment growth, rates would have to rise in the near future. This could be the big announcement this evening – an end to the use of the phrase “considerable time”. There is a discrepancy in the interest rate path that the Federal Reserve anticipates compared to the market. The central bank expects rates to rise more quickly than the market does. That gap needs to close – there’s an orderly way to do this, and there’s a disorderly path, currently I fear the latter outcome seems more likely”.
In the FED statement last night, they moved away from the use of “considerable time” in its policy rate guidance to a message of “patience”. In other words the gates have opened to a rate hike at any time and could be announced outside the FOMC meetings. FED Chairwomen Yellen, noted that the FOMC expects the declining oil prices to have a transitory effect on inflation and stimulate growth. The FOMC said it “can be patient in beginning to normalise the stance of monetary policy”, showing its willingness to hold back on changing its rates. The changing of the wording has given economists the results they were looking for. As we at ParityFX have noted many times, a rate hike in the US will come in the summer of 2015. FED Pres. Yellen continued “This new language does not represent a change in our policy intentions.” In other words we happy with the way things are moving in our economy and don’t be surprised if we surprise the market and hike rates when they were least expected.
The change in the wording sent US stocks into the black and then some. S & P up 2.04%, Dow up 1.69%, NASDAQ up 2.12%, Nikkei up 2.32% and European bourses already up over 1.25%. The USD shot through the roof with the EURUSD moving from 1.2485 to 1.2300, GBPUSD 1.5725 to 1.5575, AUDUSD 0.8275 to 0.8170 to name but a few. As we commented in our blog yesterday, we have maintained for some time that the case for dollar strengthening is sound, and in the bigger picture we stick with that view. if you are a follower and read this commentary daily you will know going to July this year we have been going on and on AND ON about the case for a strong USD calling for a target of 1.2200 (updated from 1.2000) on the 31 December. The HIGH for the day has been 1.2278 (EURUSD). Ok granted we have not “hit” my level yet, but you have to admit we hit a HOME RUN!! Eat your heart out BARRY BONDS (National Baseball Hall of Fame).
Having spoken to various clients over the past few weeks I have advised them that they MUST hedge their USD (mainly) purchases URGENTLY because of our opinions on the USD. Last night simply reinforced what we had said. The USD is king. The USD will remain king. Don’t mess with the USD!!!
We highlighted yesterday the plight of the RUB. Of all the oil exporters, Russia has endured the worst of the sell-off. The fall in oil prices and the sharp depreciation of the RUB (from 35.00 mid-year), combined with the sanctions against Russian entities limiting access to international capital markets, have raised concerns about a surge of defaults. Some of the recent moves may even invoke memories of the 1998 Russian crisis, though I would imagine the CB and Politburo would move heaven and earth to avoid such a situation. The Russian CB intervened heavily in the FX markets yesterday containing the fallout and bring the RUB back to “normality” (61.00 as I write this). Bottom line, things pretty much got out of hand and the CB had had enough. They HAD to show their hand and stop the rout. They have achieved this FOR NOW. The markets on the other hand still smell blood so don’t be surprised if we see another attack.
So much for a quiet December!!! Let it not be said but I told you so.
Have a great day ahead and let’s be careful out there.