Okay admittedly we are just about 24 hours from the Lunar New Year banquet the Fed served up “talk easy” to us but it is hard not to notice that stocks have turned over some, bonds have put in at least a temporary top and the dollar is firmer. The one market that seems to be smiling with a full belly is gold. However, the rest of the markets look like they are hungry and want more and have their eyes on the whole roasted pig being turned over a fire in the back called QE.
If the Fed has its way and its assumptions are correct, why hang around and trade? Buy stocks, sell the dollar, buy gold and own Treasuries, and go away for at least 2 years on holiday.
But we all know that the Fed’s insights are not much better or worse than the markets’ and going away for a hiatus in Bora Bora is a risky proposition if you are anything but long cash in insured deposits.
My point is that the market is not going to one the one hand look at the Fed’s rather depressed assessment of the economy (as a more or less permanent condition) and accept that the Fed won’t move the funds rate for the next 3 years as all she wrote on policy. It wants some of the crackling pig…it wants QE.
I can’t help but recall the period of active central bank intervention in FX markets that ran from the mid 1980’s to the late 1990’s and obviously still practiced in EM markets and Japan. But back in the day the FX market loved to play cat and mouse with central banks and finance ministries who pulled the trigger in FX intervention. Market participants would guess pain points for officials, take the currency to those points, force intervention and cover exposure only to rerun the game after the intervention wore off.
Frankly I see that ahead with markets jointly and QE. The markets should force the Fed into serving the whole roasted pig…bring on the QE. And this can be done by doing what the Fed does not want…selling bonds, selling stocks and buying dollars. God knows the Euro Zone will keep the fire going for the pig roast and produce regular episodes of risk off ahead, even with the relative success of the 3-year LTRO program.
I am not suggesting Fed’s communication easing and expectations management is gone, but I am suggesting that it is not sufficient a response in light of the problem it has identified…and until the Fed gets serious with QE (balance sheet expansion) don’t hoist the mission accomplished banner behind the risk on trade.
David Gilmore
fxa@fxa.com
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