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In response to a growing wave of concern from economists, traders, media commentators, the IMF, and top US politicians, Janet Yellen hosed down concern that there was broad-based risk-taking underway in capital markets and highlighted that the areas of greater concern can be confined to ‘pockets of risk-taking’.
In a statement that would be considered dovish at the margin and presumably capped losses in US treasuries after the super strong ADP private payrolls report, the Fed chairman detailed that financial stability was a role better suited to regulation and macro-prudential tools, than through its the use of interest rates.
The bears and monetary policy sceptics, many of whom seem desperate for the Fed to trip up so they can say ‘told you so’, would be pointing out that Janet Yellen’s current stance was similar to the stance of the prior Fed chairman. That would include personnel in charge of policy during the tech and housing bubbles seen during the 1990s and 2000s.
In Asia we heard from RBA governor Glenn Stevens, who used his mid-morning address to talk down the local unit; even though in a rather ironic twist he detailed that he was not actively seeking to jawbone the currency lower. In fact, if you read through his narrative, you would get the sense that the bank is certainly closer to rate cuts than hikes, although why this wasn’t expressed in Tuesday’s RBA statement is unclear.
In reality, until the actual statement re-adopts a clear easing bias, traders will be happy to buy dips. This seems true as the main reason why the AUD has caught a bid of late is down to the compelling yield investors and money managers can achieve in Australia relative to other geographies.
With volatility still at or near record lows, bond yield spreads (i.e. the premium a certain bond yield has over another) is a fundamental driver of price action.
Glenn Stevens has resorted to jawboning
Perhaps the bigger confusion came at the end of the Q&A, which was squarely focused on the currency markets and why the USD was so low. The ridicule that proceeded through social media on why Mr Stevens questioned why the USD was so low was impressive. To be fair, I would agree if told the USD was trading below 80 (or 1.2% below the average level since the start of 2013) in six months time. However, Mr Stevens obviously isn’t a currency trader and doesn’t look at the correlations between EUR/USD and inflows into peripheral bond and equity markets (well, up until a few months ago), Europe’s 2.4% current account surplus and the fact the Fed’s balance sheet has ballooned from a ratio of 1.3 times in June 2013 to currently stand at 2.1 times. Throw in the fact that the Fed performed a truly exceptional job of detailing to markets that ‘tapering is not tightening’ and has pushed back on rate hike expectations, even giving the impression that it will allow inflation to overrun its targets.
Still, if everyone found it that easy then why are currency fund managers’ benchmark indices, such as the Barclays Currency Traders or Stark Traders Index down 1.5% and 3.3% respectively year-to-date?
AUD/USD hit a low of 0.9370 on the comments, just shy of the January uptrend I highlighted yesterday. The trend therefore is still higher and the brave could think about a long position at current levels, placing a stop below the 61.8% retracement of the May 29 to July 1 at 0.9322.
It’s worth highlighting that todays retail sales will shave around 20 basis points from Q2 GDP, which is already facing a sizeable headwind from yesterday’s terrible trade deficit. Mix in Mr Stevens’ comments and it is so much easier to stand aside and focus on long GBP/AUD trades, which is eyeing a break of the May 21 high of 1.8333.
ASX 200 the star of the show again
In Asia the ASX 200 was again the star and it seems the dovish comments from Glenn Stevens have pushed the stimulus baton to Australia today. As a rule, investors want to be where the central bank is the easiest, and while the RBA is clearly not the easiest, when you hear the head of the central bank saying ‘investors underestimate the risk of a sharp fall in A$ at some point’, the equity bulls will take action.
One could make an argument that the masses of Japanese investors who piled into Australian debt in Q4 2013 and Q2 2014 will be getting a bit hot under the collar if these positions are not hedged. However it’s worth considering that any falls in the AUD will likely be mirrored by a move lower in bond yields (so they will be compensated by capital returns), but also it needs to be remembered that many Japanese players still feel the JPY will also weaken.
European markets should find modest support on open, although it promises to be an action packed day. The US payrolls print is now expected to see 215,000 jobs created, and while the S&P 500 traded in a 0.21 percentage point range yesterday (the second lowest intra-day range since 1993), copper was the big winner from the ADP payrolls report, while US treasuries were sold off to the tune of six basis points. Average hourly earnings (expected to increase 1.9% yoy) will be key for me and as I’ve said in recent reports if the fed funds rate is going up wages simply have to rise. The ECB meeting (21:45 AEST) and Mario Draghi’s press conference (22:30 AEST) should be non-events if you’re looking for action; however traders are looking for clarity on a range of issues.
I liked shorts yesterday on EUR/USD at 1.3690 and I like them even more now. A break of 1.3628 today would be positive.