‘Trapped In The Waiting Room’

As noted on Sunday evening, you should keep the aussie on your radar this week after last week’s sharp move to the upside following the RBA minutes and the subsequent attempt to jawbone it back lower a couple of days later.

That probably sounds esoteric to most US investors, but it’s a pretty important piece of the global macro puzzle and it’s part and parcel of this idea that it’s going to be exceedingly difficult for central bankers to get the messaging right when it comes to telegraphing rising rates without prompting markets to frontrun the normalization and cause currencies to overshoot in the meantime.

Former FX trader Richard Breslow’s Tuesday missive touches on that and also on the Fed, which he still thinks should probably get on with things. There’s also a bit about the euro and how to interpret the recent move to near August 2015 highs. It is, Breslow says, more about expectations for forced-PSPP tapering than it is about Fed dovishness although really, those two things are two sides of the same policy divergence themed coin.

More below…

Via Bloomberg

In a week when the central banks should be fairly muted, the numbers mixed and the political news messy, it’s hard not to notice that traders are showing mild but noticeable broad-based caution. Or, perhaps, a better word would be prudent. The trend might be your friend, but markets are most decidedly not getting carried away pushing recent views as we wait on events.

  • We’ve got the FOMC tomorrow and I’m told that they’re not going to do anything. And what they say won’t go far beyond, “See ya in September”. Reserve Bank of Australia’s Governor Philip Lowe speaks tonight, hot on the heels of his Deputy Governor being unexpectedly dovish and I’m assured he could express concern for the elevated level of the currency
  • But prices have adjusted in anticipation as if all this is acknowledged but, hey, you never know. This could all end very differently than promised. The Fed has places it needs to get to before Chair Yellen’s term is up. And Governor Lowe has a long and distinguished history of having very strong views about financial stability
  • Past performance is no guarantee of the future, even though it’s a hard concept to get our heads, and hopes, around. But if it isn’t true in investing, it’s largely true in official reaction functions. Thank you Thomas Bayes. Yet, people should realize that, by hook or crook, we are inching toward a world where global rates are going to creep higher. For if they’re not able to, we’re not in for a pause but trouble
  • And don’t let the performance of the euro suggest to you that it relates to FOMC dovishness. It’s reflective of the ground-shaking nature that a potential pullback by the ECB from their PSPP, let alone the insanity of negative rates. It’s another piece in the rates higher story. And the euro has held support against all of the crosses it should have. When ECB Executive Board Member Yves Mersch spoke this morning, the market chose to focus on the economy and inflation-bullish points, not the stimulus still needed part
  • Now here’s the really fine-tuning way to get through the wait after the big picture view. Treasury 10-year bond yield at 2.27% has support at 2.29% and resistance at 2.22% with 2.25% being the pivot. Sounds silly, I know, but should keep your attention for the day trade. Of perhaps greater importance see if the five- year can stay above 1.81%
  • For a really simple look at the Australian dollar, be mindful that just being up on the day at this level is impressive
  • There’s no reason why you can’t be trapped in the waiting room and still keep yourself occupied and have a bit of fun
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