Just a quick question. I have been away for last few weeks so have not been able to do habits.
Not sure if you have addressed this however, in case you have not. I was thinkning the US shutdow would have a macro impact (bearish USD) but to my amazement it didnt seem to affect the markets. I looked at USD pairings and it was choppy during Oct 1 to Oct 17. (perhaps asset buying is counteracting)
Although I would ot be lookig at buying ops duriing such a evironment it appears there was really no sensitivity there, no matter how long the US shutdown stayed in the news cycle.
As you have said previously our expecations are not always in line with what markets care about.
I will remove this macro catalyst from my list, in case it happens again.
What are your thoughts?
Well there may have been a mixed initial impact. The debt shut down was USD bearish for some days, as it negatively impacted growth and demand and thus lower inflation as well, so that would spur the Fed to delay taper, which equals weaker USD. Other times the USD can rally slightly if it was perceived as being a safe haven bid. (but this was mostly inactive or weak or only lasted 1 day).
The market didn’t play the whole bearish USD story until after they got the deal. Which was a bit weird, but that’s what the market decided to do. It played it more aggressively in the week or two after the debt deal.
There was a slow drumbeat of USD bearish news.
On Oct 10: Bullard says shutdown makes tapering less likely at October meeting
Oct15: Fisher says too tender a moment for reducing QE
Dudley says low inflation allows focus on employment
Then the bonds started to rise and USD started to weaken from Oct 15 and on after that.
On Oct 17: Evans says that data doesn’t currently support bond-buying taper
On Oct 21: Evans says will take a few months of jobs data before deciding on tapering
That kind of cemented expectations that the Fed will taper in 2014 I think, as a few months means they will wait past the December meeting.
Then came the Oct 22 NFP that was below forecast, but the unemployment rate dropped. I would expect the Fed to focus on the mediocre job gain rather than the drop in unemployment.
Then this week on Oct 23 the BoC said that they downgraded the growth and inflation forecasts, so perhaps that means the whole of North America is a bit weaker? And with the recent slide in Crude oil, that would also tilt the balance towards a delayed Fed taper to sometime in 2014 and thus cause USD weakness.
The “game changing scenario” is if the Fed signals a possibility to expand bond buying. But that is more of an extreme and low probability scenario.
Last week I was a bit uncertain as to what would happen. But this week with the lower NFP and potential for lower inflation, I was more comfortable to be short USD. And I expect to look to short the USD next week as well. Looking to buy EUR/USD or GBP/USD rather than AUD/USD or NZD/USD.
Opportunities in currencies were slightly limited this week since there was a decent chunk of USD weakness priced in already. Some of the better opportunities are in the equity market, where you could play the bull market there, and have company specific news/fundamental factors cause them to move, supported by the weaker USD and Fed delayed taper macro environment. With the EUR/USD and GBP/USD, you have the delayed Fed taper supporting them and pushing them higher, but they don’t have as much bullish EUR or GBP specific macro to cause them to move up too much.