Japanese Yen: BoJ Governor Planning His First Official Statement Today

Dollar: Not Enough Fed QE Tapering Evidence to Spark Risk Aversion
Japanese Yen: BoJ Governor Planning His First Official Statement Today
Euro Once Again Center of FX Traders’ Focus with Second Cyprus Vote
British Pound Torn Between UK Budget Implications, Scope for BoE to Do Far More
New Zealand Dollar Rallies Sharply after Strong GDP Report
Canadian Dollar Traders Prepared for Finance Minister’s Budget
Gold Eases as Cyprus Crisis Momentum Cools, Fed Keeps Hint of QE End

Range Trade Strategies work best in quiet market conditions – such as the Asia trading session

Dollar: Not Enough Fed QE Tapering Evidence to Spark Risk Aversion
The dollar found some support in this past session’s fundamental fireworks – but far less than what could have been realized had the Federal Reserve taken more defined steps on monetary policy. Yet, now is not the time to take our eyes off the market. The S&P 500 is just off record highs while the Dow Jones FXCM Dollar Index (ticker = USDollar) is slightly off its own two-and-a-half-year highs. The peculiar correlation between these benchmarks – on polar opposites of the risk spectrum – can come to an explosive end given the backdrop for fundamentals we retain. We must keep our focus on two fundamental elements: underlying risk trends and relative stimulus efforts.

For market-wide investor sentiment, we faced perhaps the most loaded event risk to jump start a systemic risk move seen in months. The Federal Open Market Committee (FOMC) policy decision this past session could have disrupted the market’s most dependable source of bullish fuel: stimulus. With the central bank’s regular diet of $85 billion in Treasuries and mortgage-backed securities (MBS) per months, there is the economic element of lower yields and the speculative aspect of confidence – some would say moral hazard. Removing accommodation would have equated to withdrawing the safety net from underneath the markets, which would have in turn removed the buffer for volatility and forced traders to reconsider the anemic rates of return and flimsy growth we have been left with.

The market and media were looking for a blatant sign that the Chairman Ben Bernanke and crew were laying the tracks for a stimulus exit, but such an aggressive move wouldn’t be tendered. Fed members are aware of the consequences that their actions and even language can have on markets. In the statement and economic projections released immediately after the decision to keep rates steady at record lows showed limited give in the stimulus front. The range of growth forecasts was lowered slightly while the jobless rate forecasts improved modestly. The assessment that 14 of 19 officials expected no rate change before 2015 seemed to disarm fear that the fed would be withdrawing its support in the foreseeable future. Yet, the moral hazard of stimulus will not leave the market to sell off with the first rate hike. The waves of nausea will begin well before that inevitable point. The market – guided by forward-looking speculators – will start unwinding their front-run-the-central-bank trades when the end to QE purchases is known. In the Bernanke’s presser, he said the Fed can vary its stimulus pace and there would be a ‘considerable’ gap between the end of QE and interest rate actions. He is prepping the market for the withdrawal, but stopping short of giving a clear time frame. So, US monetary policy isn’t the catalyst for risk aversion…but it also won’t prevent a run founded on other means.

Japanese Yen: BoJ Governor Planning His First Official Statement Today
Yen traders have waited with bated breath for new Bank of Japan Governor Haruhiko Kuroda’s first official press conference since Shirakawa stepped down Tuesday. The market holiday yesterday meant we have had to wait another day, but it looks like we will finally find satisfaction today with a press conference scheduled for 6 PM local time. This will prove an important fundamental event regardless of the outcome given how much speculative action has been taken on expectations leading into this moment. USDJPY has led a charge that has seen the yen drop 25 percent in the span of less than six months. A serious share of this move was based on the belief that the new policy regime would look to amplify and hasten the implementation of stimulus – particularly the 13 trillion yen ($135 billion) per month program currently scheduled to start in January. If Kuroda offers a nearer start date, the yen’s tumble can be extended. If he is mum, we could see a volatile yen cross reversal.

Euro Once Again Center of FX Traders’ Focus with Second Cyprus Vote
You would think from looking at the markets that the swell in Euro-area financial troubles had receded. This past session, the Euro climbed against all of its counterparts, the Europe specific VSTOXX volatility index dropped 2.7 vols and the region’s equities market was awash in green. Be careful of joining this premature optimism. The Eurozone’s most imminent threat is far from resolved. Cyprus managed to buy itself time by keeping the markets closed through Tuesday which in turn means the ECB doesn’t have to vote on whether to cut off liquidity to the county’s banking sector (which does not meet requirements). But, the situation is not resolved. Watch the ‘Plan B’ vote due later.

British Pound Torn Between UK Budget Implications, Scope for BoE to Do Far MorePound fundamentals were extraordinary, but a conflicting view for stimulus as well as a distraction from the Fed prevented a clean response to the headlines. The biggest splash was made by Chancellor George Osborne’s budget which cut the growth forecast in half (0.6 percent) and noted that the austerity effort was delayed. Ratings actions are likely now and a Triple Dip recession a serious risk. Our interest though was in the ‘remit’ that gives the BoE allowances to pursue more stimulus despite inflation. That said, the minutes showed limited appetite for it.

New Zealand Dollar Rallies Sharply after Strong GDP Report
On a day of exceptional event risk, the New Zealand dollar has proven itself to be the biggest mover. There is something to be said about a straight-forward fundamental report, and the much better than expected 1.5 percent (consensus was 0.9) 4Q GDP reading was that. The kiwi responded with a sharp rally on the news. Greater impact will be found on pairs that have less connection to ‘risk’ trends.

Canadian Dollar Traders Prepared for Finance Minister’s Budget
The Canadian dollar has been a silent observer over the past 24 hours – moving where its weak or strong counterparts push it. That may change in the upcoming session as we head into the Canadian budget report. Just like the New Zealand growth report, this is the kind of report that can offer a straight forward update. A commitment to austerity against a more troubled outlook – like the UK – can change the scene.

Gold Eases as Cyprus Crisis Momentum Cools, Fed Keeps Hint of QE End
It would have been tough for the fundamental scene this past session to have been less supportive of gold’s value as an alternative asset. The Fed didn’t present any new stimulus calls and the Eurozone financial tension relaxed, tempering the appeal of the commodity broadly. Bullish shouldn’t turn away yet though. If BoJ Governor Kuroda upgrades the Japanese stimulus effort, it could spur a new gold bid.
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
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