Dollar Volatility and Trend Risks to FOMC Decision Very Different

Talking Points:

Dollar Volatility and Trend Risks to FOMC Decision Very Different
Euro Stimulus Put Immediately to the Test as Greece Troubles Simmer
New Zealand Faces GDP and the Market’s Monetary Policy Forecasts

It is finally upon us. The Federal Open Market Committee’s (FOMC) March policy meeting is underway, and the group’s conclusions will be announced at 18:00 GMT (2:00 PM local time). Both the US Dollar and the S&P 500 – as a weathervane for broad investor sentiment – are at risk of losing traction on their respective bull trends. While this meeting is highly unlikely to bring any material change to policy in rates or unorthodox policy, an excessively vigilant market has its Fedspeak dictionary out with the intention to gauge the timing of the first rate hike. There will be plenty of opportunity to speculate on timing in this event. In addition the normal statement, we will receive updated forecasts on employment, inflation and interest rates as well as Chairwoman Janet Yellen’s sentiment in her press conference. For ‘sheer impact value, however, the immediate concern revolves around the inclusion of a single word: “patient”. This particular term has been construed to mean the first hike would be more than three months out. The Fed knows the market’s interpretation, and the market knows the Fed knows.

Speculation for a ‘mid-2015’ rate hike has gained serious traction over the past six months – and particularly the previous three. The Dollar’s incredible rally is testament to the weight a hawkish forecast has garnered. Given how far the market has moved, it is reasonable to presume there is an exceptional amount of premium afforded to confirmation that the next step in the telegraphed tightening regime will be realized. As such, if ‘patient’ remains; the Greenback would likely take a tumble. In fact, merely meeting expectations may see the currency ease back on the speculative swell. That said, a slip in the short-term does not alter the longer-term trend as the contrast between the Fed and its counterparts remains exceptional. For ‘risk trends’, the risk is the opposite. The implications of removing support from the system can send the masses deleveraging over-extended speculative positions. Little of this impending risk is currently reflected in the S&P 500. Short-term volatility may be the most dramatic with a push back of the first hike, but investors know it is coming.

Euro Stimulus Put Immediately to the Test as Greece Troubles Simmer

Just when one fire seems to be squelched, another flares back up in the Eurozone. The ECB recently announced its first week of asset purchases under its new QE program netted just under €10. The bearish fuel this supplies the Euro has significantly been reduced by the market’s tremendous tumble in anticipation of this effort. In turn, it does offer significant confidence for local capital markets. Yet, the currency and capital markets have more than one concern they need to keep track off. Reports Tuesday indicated an EU-Greek leader meeting ended with both parties seething about a lack of progress. Tsipras has called for the Thursday Summit to cover Greece as coffers empty.

New Zealand Faces GDP and the Market’s Monetary Policy Forecasts

FX traders may be strung out by Wednesday evening after the FOMC’s rate decision generates volatility, but the data doesn’t stop after Yellen turns off the mic. Shortly after the policy event, New Zealand will report 4Q GDP. The consensus is that the economy grew 0.8 percent through the final months of 2014 – a modest downturn from the previous 1.0 percent reading. The greatest risk of volatility comes if the data misses expectations in a meaningful way. The RBNZ seems neutral on policy but an economic push could tip them dovish like the RBA.

British Pound Looks to Jobs Data and BoE Minutes…and Fed Spillover

There are a few important fundamental events on the UK docket today. Chancellor Osborne is set to release the final budget before the election, but we’ll likely see more Sterling impact from the data. February jobs data and minutes from the BoE’s last policy meeting can tap interest rate expectations that seem to be running continually under what the central bank seems to be indicating. Much of what Carney and crew have projected is very similar to the Fed, yet BoE are significantly lower. A general hawkish view signaled by the Fed may spill over to the BoE.

Chinese Yuan Rallying Despite Building Credit Concerns after Housing Data

China remains one of the most exceptional but underappreciated risks to the global financial system. As developments focus our attention on US monetary policy, Emerging Market stability and Eurozone unity; there is less mind paid to the repercussions of the credit boom in the world’s second largest economy. We were reminded of the credit risk and economic slowdown this morning when the country’s stats group reported 69 of 70 cities reported a drop in new resident prices. With three-quarters of Chinese assets in real estate, this is concerning.

Emerging Markets: IMF’s Lagarde Sounds Warning that Fed Tightening Could Create Instability

IMF head Christine Lagarde reiterated her concerns for the Emerging Market as the US readies its change in monetary policy. Speaking alongside the Reserve Bank of India (who has also warned of the repercussions of Fed tightening), she remarked that we could witness a similar response to tightening that we had seen to the “taper tantrum” that led to sharp declines in the segments’ markets as investors contemplated an end to US QE. The MSCI EM ETF was up and JPMorgan EM VIX down this past session, but that offers little comfort.

Gold Drops for 11thtime in 12 Days Heading into Fed Decision

Reassurance from officials that core inflation would return, fear of a sour turn for capital markets in the near future and a ramp in stimulus from the world’s second largest central bank (ECB) has afforded little support to gold. The precious metal is down six straight days through Tuesday – the worst run seven months. Momentum has remained under wraps as we have neared the five-year low set in November, but a dollar swell could amplify the move quickly. Should the Greenback surge on a June rate forecast, gold will very likely suffer.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

21:45

NZD

Current Account Balance (4Q)

-3.060B

-5012B

Current account widened more than expected

23:30

AUD

Westpac Lending Index (MoM) (FEB)

0.1%

23:50

JPY

Merchandise Trade Balance Total (FEB)

-¥1000.8B

-¥1177.1

The lowered value of the Yen might be helping with exports of the country.

1:30

CNY

China Property Prices (FEB)

There are fears in the market over a China economic slowdown caused by current weakness in the property sect