The Most Important Part Of The Rate Decision

• August 10, 2004
• Dave Floyd

While today’s decision by the Fed will likely offer some
clues near-term, it would appear that the markets, most notably FX, will still
be left with several unanswered questions. 
Economic data is mixed at best, inflation numbers are stubbornly edging
higher, although a meaningful drop in inflation in the UK was reported
overnight.  The result in recent
days has been an increase in risk aversion. 

 

  Some
FX dealers are speculating that the Fed may actually hold off on rates as a way
of seeing what August’s data indicates, while that would be intriguing and
palatable from a short-term trading standpoint (volatility would rise) it would
likely due significant damage to recent Fed statements that were adamant that
recent soft spots were just that.  As
mentioned in yesterday’s Weekly FX Strategy, while labor statistics
have been troublesome, the other data such as ISM and retails sales have been
fairly solid.  Additionally, in such
an accommodative rate environment, an additional 25 bp’s does not represent
significant tightening.

T  Dollar bulls had
little to cheer about as there was barely a bounce after Friday’s sell-off. 
The break of this range will likely be driven by what the Fed says. 
However, with regards to the Yen (JPY), oil prices will continue to
dictate price direction.  With oil
hitting $45 yesterday, the JPY was simply offered. 
Many believed that the weak jobs report last Friday would have caused the
price of oil to decline as it indicates a possible softening in the economy, but
that has yet to transpire.  The
continued threats of terrorism and the Yukos story will likely keep a bid in oil
as well as the Swiss Franc (CHF).

 
This will be a welcomed opportunity as forecasting even 1-2 days ahead at
present has been a real challenge.  The
key will be not only the decision, but the accompanying statement. 
Shorter-term traders should be able to capitalize on either scenario
(i.e. a dollar bullish or dollar bearish outcome). 
If you are unwilling to establish these types of positions, the aftermath
will likely add more clarity to near-term price action. 
It seems logical at this stage that currencies like AUD and NZD stand to
benefit in the days and weeks to come.  The
risk in this story is a meaningful slowdown in China. 
However, with a soft landing widely anticipated and risk aversion running
high, these high yielding currencies will likely gain favor.

12.0pt;font-family:Arial”>  1.2317,
1.2290, 1.2245

12.0pt;font-family:Arial”>  1.8290,
1.8313, 1.8365, 1.8402

12.0pt;font-family:Arial”>  1.2578,
1.2460

12.0pt;font-family:Arial”>  .6550,
.6529, .6510, .6623

Dave Floyd