12 Jul 2013
U.S. Dollar longs - 'Septaper' reassurance key for a comeback
FXstreet.com (Barcelona) - As the week in the FX arena comes to an end, the market is still trying to make sense from both the FOMC minutes and the subsequent dovish message to financial markets by the Federal Reserve Chief Ben Bernanke.
According to Greg McKenna, CEO at GlobalFX, "Personally I think he and his colleagues have been clear about what they intend to do. They are going to taper sometime soon but they are going to leave rates low for an extended period of time until they are comfortable rates can move higher from the 0-0.25% range for the Fed Funds rate."
A fundamental expert in the U.S. economy, that is, Kathy Lien from BK Asset Management, has little doubt that while Bernanke's comments were more dovish than most investors anticipated, "it is important to realize that Bernanke said nothing to change the prospect of a reduction in asset purchases this year" Lien said.
Lien, in fact, sees the FOMC minutes as providing clarity in order to understand the course the Fed is heading, saying that "some members were supporting an even more aggressive timetable that would end asset purchases this year, which gives investors a sense of how committed policymakers are to lowering the amount of stimulus in the economy."
Up until Bernake's bombshell, the 'USD show' had been running almost undisturbed for quite a while, an indication that the market was placing all the eggs in the 'Septaper' basket, thus leaving but few market participants left to keep building on US Dollar long positions even if the divergence between U.S and other G10 monetary policies continue to widen.
In view of Lien, "there is still a major divergence underway between U.S., ECB, BoE, BoJ and RBA monetary policies that will only intensify when the Fed tapers in September; under this environment, we continue to expect the dollar to strengthen with current levels being a potentially attractive opportunity to go long."
The wild volatility seen in the US Dollar this week is a reflection of the highly speculative bets put in one single line of thinking, that is, the Fed will ease in September. Although the brutal long squeeze in the US Dollar came at a time when thin liquidity was present in the markets - transition between NY and Tokyo markets - which amplified significantly the moves seen, at this point, the market is walking a delicate thin line with huge bets on the timing of the QE taper by the Fed being September.
The immaculate rally in the USD up to Bernanke's speech was a reminder that almost all pricing in the 'Septaper' had been done, thus any slight setback on this risky assumption may have, as seen, chaotic consequences in the market place. Bets are no longer on the 'ifs' of the taper, which does appear a done deal as the U.S. jobs market continues to improve and above 50% of the Fed members support the idea, but on the 'timing'.
Whether or not the US Dollar is able to get back on its feet and regain the strength will be directly dependable on the next hints by the Fed. It is a race to get the 'timing' right other than the actions per se. Any new events altering the perception of the market on a 'Septaper' are likely to put the US Dollar under further pressure, while a re-adjustment of views in favour of the reduction of asset purchases will likely bring the committed US Dollar back in the game.
According to Greg McKenna, CEO at GlobalFX, "Personally I think he and his colleagues have been clear about what they intend to do. They are going to taper sometime soon but they are going to leave rates low for an extended period of time until they are comfortable rates can move higher from the 0-0.25% range for the Fed Funds rate."
A fundamental expert in the U.S. economy, that is, Kathy Lien from BK Asset Management, has little doubt that while Bernanke's comments were more dovish than most investors anticipated, "it is important to realize that Bernanke said nothing to change the prospect of a reduction in asset purchases this year" Lien said.
Lien, in fact, sees the FOMC minutes as providing clarity in order to understand the course the Fed is heading, saying that "some members were supporting an even more aggressive timetable that would end asset purchases this year, which gives investors a sense of how committed policymakers are to lowering the amount of stimulus in the economy."
Up until Bernake's bombshell, the 'USD show' had been running almost undisturbed for quite a while, an indication that the market was placing all the eggs in the 'Septaper' basket, thus leaving but few market participants left to keep building on US Dollar long positions even if the divergence between U.S and other G10 monetary policies continue to widen.
In view of Lien, "there is still a major divergence underway between U.S., ECB, BoE, BoJ and RBA monetary policies that will only intensify when the Fed tapers in September; under this environment, we continue to expect the dollar to strengthen with current levels being a potentially attractive opportunity to go long."
The wild volatility seen in the US Dollar this week is a reflection of the highly speculative bets put in one single line of thinking, that is, the Fed will ease in September. Although the brutal long squeeze in the US Dollar came at a time when thin liquidity was present in the markets - transition between NY and Tokyo markets - which amplified significantly the moves seen, at this point, the market is walking a delicate thin line with huge bets on the timing of the QE taper by the Fed being September.
The immaculate rally in the USD up to Bernanke's speech was a reminder that almost all pricing in the 'Septaper' had been done, thus any slight setback on this risky assumption may have, as seen, chaotic consequences in the market place. Bets are no longer on the 'ifs' of the taper, which does appear a done deal as the U.S. jobs market continues to improve and above 50% of the Fed members support the idea, but on the 'timing'.
Whether or not the US Dollar is able to get back on its feet and regain the strength will be directly dependable on the next hints by the Fed. It is a race to get the 'timing' right other than the actions per se. Any new events altering the perception of the market on a 'Septaper' are likely to put the US Dollar under further pressure, while a re-adjustment of views in favour of the reduction of asset purchases will likely bring the committed US Dollar back in the game.