We are reissuing our commentary from “Morning Slices” as we feel it is very appropriate as we head into Thursday trade. As we mentioned in our “Opening Comment” from Wednesday, market participants had been taking time to digest the latest Fed rate decision and accompanying monetary policy statement in order to establish a clearer directional bias.

The initial market reaction proved to be the false one, with the US Dollar selling off sharply in the hours following the Fed into the New York close, on the back of the news that the Fed would reinvest maturing mortgage backed bond proceeds into long dated US Treasuries, and the statement that the pace of recovery was likely to be more modest in the near term than had been anticipated. Intuitively the rate decision was on the whole quite dovish and the initial reaction made sense, with the net effect to only make yield differentials even less attractive for the Greenback. However, since the Wednesday's Asia open, the exact opposite has been the case, with the US Dollar rate rallying sharply across the board (with the exception of the Yen).

In our opinion there are three main drivers of this latest market reaction in favour of the buck.

ONE - The expectation for some form of quantitative easing from the Fed on Tuesday was very much priced in to the markets, and as such, we have been seeing a buy the rumour sell the news market reaction.

TWO - The fact that the Fed still remains quite downbeat on their outlook for the US economy, after even downgrading their assessment on Tuesday, is quite concerning to the global economy as it potentially warns that yet another ripple effect could be felt from the weakness in the US economy. This has resurrected a wave of risk aversion that has ultimately resulted in the latest broad based liquidation of riskier investments (reflected through lower currencies, equities, oil prices etc). Certainly the latest data discouraging data out of China helps to reinforce this point.

THREE - Technical studies have been warning for some form of a material correction back in favour of the US Dollar after the currency has dropped off significantly over the past several weeks against all major currencies, including even the Swiss Franc and Japanese Yen. All three of these factors suggest that we could see a more sustained US Dollar exchange rate rally over the coming days and we would therefore look for opportunities to buy the buck on any intraday dips. The one other currency that stands out at present is the Yen, and we would also recommend that traders start to think about looking to establish a meaningful long position in Usd/Jpy.

At this point, we would not be surprised to see one more drop lower towards 84.00 to clear out any lingering stops, before a nasty upside reversal. While the Yen traditionally benefits in negative equity/flight to safety environments on the back of its low yielding status, in our opinion, the single currency could start to come under pressure even in the event of a widespread equity decline and renewed global uncertainty, with the Bank of Japan likely to resurrect its sleeping intervention policy. As such, we would be on the lookout for any big drops below 84.70 in order to consider establishing a fresh long position.

Looking ahead, there is certainly more room for this latest wave of price action to continue, and the risks from here are for a continued reduction of long currency, equity, and commodity positioning. On the data front, the Australian Dollar is in the spotlight, and could be at risk for some fresh downside with key Aussie employment data (20k change expected/5.1% unemployment) due up at 1:30GMT.

Japanese data will also get some attention with industrial production and capacity utilization due at 4:30GMT, followed by consumer confidence at 5:00GMT. Also out earlier in Asian trade is New Zealand PMI at 22:30GMT. The European calendar is quite light, with the only key release coming in the form of Eurozone industrial production (0.6% expected) at 9:00GMT.

For the full story please visit www.dailyfx.com

 

Bye for Now

 

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