What Is Clear About A 50 bp Hike
Greenspan Comments = Weaker USD
Dovish comments by Fed chairman Greenspan and
in-line core CPI numbers did little to lift the Dollar yesterday. Technically
the Dollar is now looking rather ragged…again. The break below 89.60 set the
stage for a sell-off that persisted all day, however, longer-term momentum
indicators remain bullish. It looks like the Dollar will be erratic going
forward.
Greenspan reiterated his common statement that
the economy is growing in a solid fashion, but that inflationary pressures are
not likely to be a serious concern in the period ahead. He went on to say:
“Going forward, we must remain
prepared to deal with a wide range of events. Particularly notable in this
regard is the fortunately low, but still deeply disturbing, possibility of
another significant terrorist attack in the United States. Our economy was able
to absorb the shock of the attacks of September 11 and to recover, though
remnants of the effects remain. We at the Federal Reserve learned a good deal
from that tragic episode with respect to the impact of policy and, of no less
importance, the functioning under stress of the sophisticated payments system
that supports our economy. Our efforts to further bolster the operational
effectiveness of the Federal Reserve and the strength of the financial
infrastructure continue today.”
It is now clear that that a 50 bps hike
in June or August is not in the cards now. Bonds were the major beneficiary of
this sudden unwinding of trades that were pegged for a Fed tightening. Rates
are now lower, and assets rising, attracting foreign capital which pays in
Dollars. On the other hand, as rates go lower, equities rally and the rest of
the world looks like a reasonable investment. Case in point, the “China Hard
Landing” trade has flamed out, as commodity based currencies had a nice bid
today. The “Goldilocks” investment climate may yet again be with us.
Going forward, there are really only two ideas
that have solid merit, long NZD/USD as a
continued play on China managing a moderation in growth and short
USD/JPY. Yes, there are other technical
set-ups which are reasonable, but these two have solid macro underpinnings. A
break of the 109 level should set the stage for a move to 107.80 and then 106.Â
Remember, there has been no BoJ intervention for some time now to weaken
the Yen, as most major exporters appear to be hedged in the 105 area against a
strengthening Yen.
As always, I welcome your comments and questions.