Daily Briefing

Fed-Speak the Focus for This Week After Stocks, Dollar Descend

Price Action, Swing & Short Term Trade Setups

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Talking Points:

- Equity markets have gapped-lower after the weekend announcement that no health-care bill will be passed. This has raised fresh questions around the continuation potential of the ‘Trump Trade’.

- The bigger issue at the moment is the Fed. The Federal Reserve hiked rates two weeks ago, and matters haven’t really been the same since. This week brings 14 different Fed-speeches to markets, and these will likely be the drivers for this week.

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In Friday’s piece we warned of price gaps in markets around the healthcare bill; with the logic being that a tally of votes on the bill was unlikely to come-out ahead of market close on Friday – so when markets re-opened for business on Monday we’d have a new piece of information to price-in.

That healthcare bill did not get through the House of Representatives, and with this being the first major piece of legislation from the Trump administration fresh questions have been raised around the rest of the President’s policy outlay; mainly in the realms of tax cuts and infrastructure spending. Markets have gapped-lower to open this week, and as questions continue to circulate around the continuation potential of the ‘Trump Trade,’ we’re likely going to see some pressure remain. On the chart below, we’re looking at price action in the E-Mini S&P Futures contract in order to focus on the move after this week’s open. We also look at two potential levels for ‘next stop’ support.

Fed-Speak the Focus for This Week After Stocks, Dollar Descend

Chart prepared by James Stanley

This isn’t isolated to U.S. issues: We’re also seeing an aggressively-bearish move in the Nikkei. Last week saw a break of an ascending wedge formation but sellers were unable to create significant-drive to break the Nikkei out of its months’ long range. Friday of last week saw an under-side re-test of the prior trend-line; with this morning’s price action driving prices further away to create a ‘trend-line rejection’ on the setup. This gives the appearance of bearish continuation potential.

Fed-Speak the Focus for This Week After Stocks, Dollar Descend

Chart prepared by James Stanley

The Nikkei isn’t the only market out of Japan seeing some interesting volatility after the open. The ‘sharp repricing’ of the Trump Trade has created considerable Dollar weakness, and this has created de-facto Yen-strength against many other currencies as risk-aversion flows reverse prior trends. USD/JPY is running down to a very interesting support level around the ¥110.00-handle. This is a confluent level, as we have not only the psychological level of ¥110, but ten pips below we have the 50% Fibonacci retracement of the ‘Trump Bump’ that came-in to markets after the Presidential election.

If support develops around the ¥110.00-handle in USD/JPY, an attractive reversal setup could be sought. But if support doesn’t hold – and if we do see a sustained-break below this zone around ¥110.00 – the prospect of bearish continuation would look considerably more attractive.

Fed-Speak the Focus for This Week After Stocks, Dollar Descend

Chart prepared by James Stanley

Matters Haven’t Been the Same Since that Last Hike (What to Watch For):

This week sees 14 separate Fed-speeches on the calendar. This will likely be the key driver for markets as we probably won’t be hearing any revelations on the health-care or tax cut front.

Much of the world’s attention appears to be focused directly on Washington. But for much of the ‘Trump Bump’, the key driver of the Federal Reserve has remained. What’s really appeared to complicate current matters was the most recent rate hike in the middle of March. When we came into the month there was little expectation for a move, with odds hovering around 30-40%. But just ahead of Donald Trump’s Joint Address to the Union on February 28th, we heard from San Francisco Fed President, John Williams, who provided some very hawkish commentary, indicating that the Fed may have been ready to move in two weeks at their next rate decision. The following morning, after President Trump’s Joint Address to the Union, the S&P 500 spiked up to set a new all-time-high. And then the rate hike from two weeks ago prodded a quick-extension of that rally; but this failed as sellers came-in to rebuke that bullish advance with a lower-high.

Fed-Speak the Focus for This Week After Stocks, Dollar Descend

Chart prepared by James Stanley

So, both U.S. stocks (and many risk markets) and the U.S. Dollar have put in bearish-moves after a) the rate hike and then b) the failure of Congress to put together a passable health-care bill. This week brings 14 different Fed speeches to the fray, and this will likely denominate that ‘next move’ across capital markets. If the Fed sticks with their persistently-hawkish language, indicating that two more rate hikes are on the horizon, then we could see this bearishness continuing in the near-term But, if the Fed does pump the breaks, urging caution after a recent rate adjustment, we may see some element of strength return to equity markets.

Below, we look at the 14 Fed-speeches that are on the calendar for this week (all times Eastern). Pay special attention to mid-day on Tuesday, as we’ll have Esther George, Janet Yellen and Robert Kaplan all speaking at the same time.

Fed-Speak for this Week:

Monday 1:15 PM Charlie Evans

Monday 6:30 PM Robert Kaplan

Tuesday 12:45 PM Esther George

Tuesday 12:50 PM Janet Yellen

Tuesday 1:00 PM Robert Kaplan

Tuesday 4:30 PM Jerome Powell

Wednesday 9:20 AM Charlie Evans

Wednesday 11:30 AM Eric Rosengren

Wednesday 1:15 PM John Williams

Thursday 9:45 AM Loretta Mester

Thursday 11:00 AM Robert Kaplan

Thursday 11:15 AM John Williams

Thursday 4:30 PM William Dudley

Friday 10:00 AM Neel Kashkari

--- Written by James Stanley, Analyst for DailyFX.com

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DXY Plunging on Cloudy US Fiscal Policy Outlook

News events, market reactions, and macro trends.

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Talking Points:

- Failure to pass healthcare reform has markets questioning the viability of US President Trump's ambitious fiscal stimulus plans.

- Lack of clarity over US fiscal outlook means faster Fed rate hike cycle is unlikely; two more rate hikes for 2017 in question now.

- The crowd has increased their net-short EUR/USD and net-long USD/JPY positions, which means a US Dolllar low may not have been found yet.

For the US Dollar, March couldn't have gone any worse. After the Federal Reserve made clear at their March 15 policy meeting that they had not factored US President Donald Trump's ambitious fiscal stimulus objectives into their Summary of Economic Projections (SEP), markets were given their clearest signal yet that the "Trump reflation trade" got far too ahead of itself.

As I wrote before I went on holiday last week, "the uncoordinated rollout of the Affordable Care Act replacement (ACA or Obamacare), the American Health Care Act (AHCA), is a poor litmus test for future policy endeavors. The logical assumption is, given the disdain by Republicans over the last 8 years towards the ACA, this should have been a straightforward legislative process now that the GOP controls the House, the Senate, and the White House, and thus, why would markets be correct in thinking that more ideologically challenging legislation like a $1 trillion infrastructure spending bill pass with much ease (if at all)?"

It seems that this fear for the US Dollar is being realized. If a bout of deficit spending is now unlikely to materialize, the Federal Reserve will have no reason to push up expectations for a faster-than-previously-anticipated rate hike cycle. As per the Mundell-Fleming framework (or IS-LM-BOP model), given the United States' high capital mobility, loose fiscal policy should lead to a rise in inflationary pressures, which in turn should necessitate tighter monetary policy from the Federal Reserve.

In reverse, the diminished prospect for fiscal stimulus means inflationary pressures won't rise to the degree previously thought, so the Fed won't be inclined to hike more than what's priced into markets already. In fact, a look at Fed funds futures this morning shows that two more rates in 2017 - the market's base case scenario - are being priced out. So, while market participants may not see a direct connection between the failed healthcare vote and the US Dollar's dive in recent days, it's certainly there. US Dollar bulls should be more than concerned at this point in time.

Read more: Weekly Trading Forecast: Trump Trade Reversal in the Works?

--- Written by Christopher Vecchio, Senior Currency Strategist

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Follow him on Twitter at @CVecchioFX

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Yen May Weaken as US Dollar Gains with Markets in Digestion Mode

Fundamental analysis, economic and market themes

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Talking Points:

  • Yen may fall as US Dollar rebounds with markets in digestion mode
  • British Pound eyes Johnson comments as Brexit trigger looms ahead
  • NZ Dollar drops with local yields, hinting at softening RBNZ outlook

Currency markets lingered in digestion mode in Asian trade as markets digested the aftermath of last week’s failure the AHCA healthcare reform measure in the US and its impact on the so-called “Trump trade”. The New Zealand Dollar narrowly underperformed as local bond yields declined, pointing to near-term deterioration in the RBNZ policy outlook.

Looking ahead, the absence of top tier economic data will probably put comments from UK Foreign Secretary Boris Johnson initially into focus. He is scheduled to answer questions in Parliament, with Brexit-related queries likely to predominate as the government prepares to formally begin divorce proceedings this week. A long negotiation is ahead but Mr Johnson may yet offer tidbits potent enough to move the Pound.

The spotlight then turns to Fed-speak. Comments from Fed Chair Janet Yellen will probably take top billing. Governor Jerome Powell as well as Kansas City and Dallas Fed Presidents Esther George and Robert Kaplan are also schedule to speak. Fiscal policy uncertainty is no less a problem for central bank officials than it is for markets however, so clear-cut guidance with lasting US Dollar follow-through seems unlikely.

On the sentiment front, futures tracking top European and US equity index benchmarks are pointing convincingly higher. This hints that the lull in big-ticket event risk may offer space for a corrective recovery in sentiment and the broader “Trump trade”. That probably bodes ill for the anti-risk Japanese Yen while the greenback edges higher, at least in the very near term.

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Asia Session

Yen May Weaken as US Dollar Gains with Markets in Digestion Mode

European Session

Yen May Weaken as US Dollar Gains with Markets in Digestion Mode

** All times listed in GMT. See the full DailyFX economic calendar here.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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