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Currencies In The Doldrums As FOMC Meets

Advance guidance has the desired effect

All the fun has been taken out of trading in the recent past as ‘advance guidance’ a relatively new phenomenon that is used by both the BoE Governor and Fed Chair defuse the speculation surrounding monetary policy meetings.

Fundamental traders, those who trade based upon economic data and political developments see a vastly reduced opportunity to speculate and tech guys who use charts in the manner of alchemist, poring over graphical representations of currency markets must deal with ever narrowing ranges. As an illustration, the single currency has traded in a 1.0400/1.0800 range since November 2016.

It must be remembered before tauper finally sets in that these are the type of markets ripe for a ‘flash crash’ should there be a withdrawal of liquidity if a Black Swan event were to occur. It is the nature of a black swan that it is something impossible to predict but the following are some events that I have culled from several published lists (in no particular order):

  • China free floats the Yuan
  • Another Brexit style departure from the EU
  • Inflation in Japan
  • Turkey and Russia enter armed conflict
  • Iran and Saudi Arabia fight more than a ‘proxy war’
  • A nuclear or chemical terrorist attack with thousands of casualties

Black Swan lists are overtaking dead pools as traders ‘diversion of choice’ as years come to an end. The seriousness of these events varies but the effect on markets could be devastating

Today’s rate hike by the FOMC is such a case. Janet Yellen has been at pains to explain just what the Fed is looking for to hike rates and traders can join the dots of data releases and determine for themselves that those conditions have been met.

What is a little trickier is determining what the FOMC’s longer term stance is and there is no advance guidance for that which means that not only can traders speculate they can also take positions based on their own, unencumbered, views.

It was generally assumed at the start of the year that the Fed had a ‘three hike’ strategy but they will have hiked twice in the first quarter in addition to which President Trump’s promised (but so far undelivered) stimulus is still to come.

Politics makes a comeback.

Following a recent lull in activity, political matters are set to return and provide a driver for the market.

Since his bizarre wire-tapping accusations, President Trump has kept a low (very low for him) profile. It is the nature of the beast that this cannot continue and he is likely to ‘break the shackles’ and pronounce on currency manipulation, the performance of the Fed, the building of the wall, or some other issue where he feels stomping down with his size ten would be a Presidential action.

The Dutch go to the polls today with the spat with Turkey resonating across Europe. With such a right-wing opponent standing against him with an ‘anti-everything that isn’t Dutch platform, Prime Minister Mark Rutte has uncovered a tough side in dealing with the rhetoric of Turkish President Tayyip Erdogan.

The Brexit Bill has finally passed through parliament and will allow Prime Minister May to trigger Article 50 and start the process. Since this is an unprecedented event, market reaction will be interesting. There are very few events that are so ’emotional’ and trader’s reaction driven by their own feelings about the EU will cloud judgements and produce wholly unpredictable results.

France is voting for a new President on 23rd April with a final runoff on May 7th. It is notable that many newspaper and web-based articles have sprung up questioning just how Right Wing National Front Candidate Marine le Pen really is. Whether it is her opponents trying to defuse populist/ nationalist sentiment or her own supporters trying to show she is more electable the whole process will be played out over the next six weeks providing gyrations for the single currency which are unlikely to break the ‘well-trod path’ of his year’s ranges.

Germans and Italians will look on with interest since there is an election in Germany this September as well as the possibility the Italian Prime Minister may call an election if he sees no way out of the constitutional crisis that continues to pervade Italian politics.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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