Notes From Underground

It seems that the FOMC meets in Noah’s Ark (Genesis Chapter 8;Verse 8-12): “Then he sent out the DOVE from him to see whether the waters had subsided from the face of the ground. But the DOVE could not find a resting place for the sole of its foot and it returned to him to the ARK, for water was upon the surface of all the earth …. He waited again another seven days, and again sent out the DOVE from the ARK. The DOVE came back to him in the evening and behold! an olive leaf it had plucked with its bill! And Noah knew that the waters  had subsided from upon the earth” (Artscroll Translation).

There it is: the DOVES are still in flight until the healthy branch of growth can be found and then the DOVES can leave the ARK and enjoy all things taking flight. The FOMC statement was dovish pretty much as was written in NOTES the previous night. The key take-aways for me were the enhanced language of the global situation: “The COMMITTEE IS CLOSELY MONITORING GLOBAL ECONOMIC AND FINANCIAL DEVELOPMENTS AND IS ASSESSING THEIR IMPLICATIONS FOR THE LABOR MARKET AND INFLATION.” Rather than turning a deaf ear to the harsh criticisms from Gundlach and Dalio this sentence gives credence to the possible impact from the deflationary headwinds that China and Europe are facing. The FED did keep in place in the usual fourth paragraph: “READINGS ON FINANCIAL AND INTERNATIONAL DEVELOPMENTS.”

Adding to the sense of walking back the December dot plot of four rate rises was this line in the first paragraph: “Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation DECLINED FURTHER; survey-based measures of longer-term inflation expectations are little changed,on balance,in recent months.”

I highlighted the key words of DECLINED FURTHER for in my mind that is FED nuance for the impact of a STRONG DOLLAR on not just energy prices but of all imports. The FED does not discuss the DOLLAR in official releases. Individual speeches, maybe, but the DOLLAR is the purview of the TREASURY Secretary and thus the executive branch. But if you have followed the currency markets in the time period after the FOMC statement the DOLLAR HAS WEAKENED. The EURO has strengthened as so many shorts exist due to carry trade positioning. In an effort to unwind EURO short positions the EUR/YEN and EUR/SWISS have had sizable rallies. Chair Yellen has made Mario Draghi’s life a bit more difficult for it will be the ECB that has to weaken the EURO rather than depending on the FED to strengthen the DOLLAR by raising rates. As the news from Europe grows worse the ECB will have the EU and EURO as a major task.

Tonight, the BOJ announces its monetary policy and consensus is for NO CHANGE. It seems that Governor Kuroda will proceed with CAUTION so as not to infuriate the CHINESE by getting into a battle of currency depreciation. On Monday, I wrote that Kuroda suggested the People’s Bank of China and the political authorities would be better served to implement EXCHANGE CONTROLS in an effort to stem the outflow of FX and thus YUAN depreciation. Some analysts are thinking that the BOJ will announce an increase in QE tonight because of the resignation of Economic Minister Amari, the architect of ABENOMICS.

I maintain no change. The best indicator may be the NIKKEI for if there’s no change traders may sell the NIKKEI because of no new liquidity to the market. I will be entering my buy levels at technical support far from where the market closed because I don’t think no change is significant. Also, a no change will get a rally in the YEN but watch where the EUR/YEN cross holds for market sentiment. Last week’s HIGH IN EUR/YEN was 128.58 and it closed today at 129.98 … just giving the picture for perspective.

Well, we will have to see if the monetary DOVES EVER FIND ENOUGH ECONOMIC GROWTH SO THE  LIQUIDITY OF ZERO BASED INTEREST RATES AND QUANTITATIVE EASING RECEDES AND THE GLOBE CAN RETURN TO NORMAL.

Tags: Abenomics, dove, ECB, EUR/CHF, Eur/Yen, Euro, Fed, FOMC, Janet Yellen, Nikkei, U.S. Dollar

This entry was posted on January 28, 2016 at 4:26 pm and is filed under BoJ, Currency, Fed. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.