All the FX and Capital Markets Observe Pre-Fed Silence
- Anticipation for the Fed usually curbs speculative drive, but the S&P 500 reflects ever-incredible extremes in complacency
- Despite an impending Fed decision with new forecasts and QE plans, VIX is at 10 and the SPX 5-day ATR is at holiday levels
- While the Dollar is in the spotlight; traders should keep tabs on the Pound, Aussie, Kiwi and Yen crosses
A persistent reach for benchmarks like the EUR/USD and US equity indexes (S&P 500 and Dow) reflect exceptional risk ahead of a Fed rate decision that can very readily surprise and generate volatility. How are retail FX and CFD traders positions heading into the event risk? See the DailyFX Sentiment page to find out.
Capital markets seemed frozen at their extremely confident - and complacent - extremes. The S&P 500 set yet another record high while the VIX hovered just above 10. That is remarkable for both what happened this past session and what lies ahead. Among other scheduled and unscheduled developments, one of the most headline-worthy events was US President Donald Trump's remarks at his first UN speech. The leader of the free world made clear the America-first stance he had campaigned on with the protectionist influence that carried. More remarkable however was the rhetoric and tone he brought with countries that have had difficulty with the United States over the past months and years. Special mentions were made to Iran and Venezuela, but it was his threat that North Korea would be 'totally destroyed' should the US be provoked to protect itself or its allies. These escalating words and threats have produced distinct volatility across the market recently, but we registered none of that this past session. In fact, the 5-day (1 trading week) average true range for the benchmark equity index dropped to its lowest level since December 2014. In fact, we are registering quiet not seen outside of holiday trading conditions all the back to 1996.
It would seem reasonable that the markets are collectively inhaling before the important event risk ahead - specifically the Fed rate decision - but to maintain such an extreme imbalance in favor of risk exposure registers as particularly unstable. The US central bank us due to weigh in on monetary policy at its meeting with the upcoming session. There is no chance of a hike according to Fed Funds futures, and I don't disagree with that assessment. However, that isn't where the speculation ends. The outlook for policy over the remainder of the year and into 2018 will find specific milestones in the updates the group offers with this 'quarterly' meeting. Furthermore, there is heavy anticipation that the Fed will take the remarkable step of reversing its policy bearings further by pulling the trigger on their stimulus reduction efforts. This presents distinct volatility risk for both the US Dollar and general risk trends. I'm partial to EUR/USD on a hawkish Fed outcome, USD/JPY with a dovish resolution and believe there is an extreme skew in favor of risk aversion amid belief that excessive easing will be further withdrawn.
Aside from the extreme exposure to the Dollar and Yen crosses to the US central bank policy update, there are a range of alternative currencies that are either active now or present potential with the right motivation. The Sterling this past session was starting to feel the influence of reports that Foreign Minister and 'Leave' champion Boris Johnson may soon leave Prime Minister May's cabinet. Also interest was an FT report that the UK government may pay 20 billion pounds in an EU exit bill in order to secure access to the single market. The Pound didn't generate too strong a response as pairs like GBP/USD and GBP/JPY were distracted. For the Aussie and Kiwi Dollars, event risk ahead presents market moving potential with RBA Governor Lowe due to speak and New Zealand 2Q GDP due after the FOMC decision. They may not reach the global markets, but they can certainly stir pairs like NZD/CAD, EUR/AUD and AUD/NZD. Then there is the Chinese Yuan. A mystery given the outside influence that the government represents, but showing the pressure it is generating via the pressure on the tolerance band for USD/HKD and its recent volatility. We discuss all of this and more in today's Trading Video.
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