The taper tantrum and Fed-hike furor
FX Consultant / IFXA Ltd
· Fed rate-hike expectations fade
· Oil rallies on fairy tale
· USDCAD firms on BoC inflation outlook
Why move when you can stand still? Photo: iStock
By Michael O’Neill
The Bank of Canada left interest rates unchanged and offered up a pretty neutral outlook, as far as USDCAD was concerned. USDCAD rallied on the reference that inflation risks tilted to the downside.
Tantrums and furors
It is only a little more than three years ago when then Federal Reserve chairman Ben Bernanke lit the fuse to the phenomenon known as that “taper tantrum”. In May 2013, the Federal Reserve was buying bonds to the tune of $85 billion/month and markets were wondering when the programme would end. One of the key criteria to determine when to start reducing purchases was improvement in the labour market.
On May 22, 2013, Mr. Bernanke, responding to a question from the Joint Economic Committee, replied “in the next few meetings we could take a step down in our pace of purchases”.
“Taper Tantrum” entered the lexicon of financial markets.
US Treasury yields surged as investors reacted and sold bonds. Bernanke’s forward guidance was such that the market was so convinced that the Fed would announce the tapering program in September, the only question was the amount. The US dollar rallied. EURUSD dropped from 1.3420 to 1.2750 within a couple of weeks.
It didn’t happen. The Fed left the stimulus programme as it was and chastised markets by saying that the programme “was not on a preset course”.
Fast forward to June 2016. The taper tantrum is just a memory. In its place-a rate rise rage. Fed speakers including Fed chair Janet Yellen implied that a rate increase was very likely at the June Federal Open Market committee meeting. It didn’t happen.
Since then, and with two robust nonfarm payrolls reports under their belts, there has been no shortage of Fed speakers advocating a rate hike in September. Janet Yellen’s Jackson Hole speech really upped the ante when she appeared to support a September rate increase by saying "I believe the case for an increase in the federal funds rate has strengthened in recent months”. Once again, US dollar rallied. EURUSD dropped from 1.1340 to 1.1120.
Both Bernanke and Yellen gave themselves “get out of jail free” cards. Bernanke was fond of saying that the Fed was “not on a pre-set course” while Yellen used “rate moves are “data dependent”.
And the latest batch of US data has been somewhat less than awe-inspiring. It hasn’t been horrible but it has been mixed. The Conference Board’s Consumer Confidence Index was at an 11-month high, July factory orders rose 1.9%, PCE was up and the jobless rate was a steady 4.9%. On the negative side, manufacturing and services ISM indexes both declined and the closely watched nonfarm payrolls report was below forecast.
FX traders looked at the negative data, particularly the ISM reports, took note of the Fed’s constant reference to “being cautious”, recalled the June rate hike flip-flop and bailed out of US dollars. EURUSD rose to 1.1260 from 1.1140 while USDJPY has dropped to 101.20 from 104.30. The CME FEDWatch Tool has the probability of a September rate hike at just 15%, down from 30% a week earlier.
September is getting a bad rap. Since 2013, the September FOMC meeting has been preceded by lofty expectations that are not met. The September FOMC expectations were low but markets still wanted an indication of when the first rate hike would occur following the end of tapering. They didn’t get it. Markets were primed for the first rate hike in seven years ahead of the September 2015 FOMC meeting. It didn’t happen. And once again, traders are expecting policy action from the FOMC ins September.
There had been an expectation for a bit more of a rush-hour crowd in the US. Photo: iStock
Fairy tales and oil deals
Oil market price swings since June would rival the wildest rollercoasters on the planet. WTI has bounced between $39.20-$51.60/barrel on ever-shifting forecasts for oil prices. The August surge was predicated on reports that price-support mechanisms would be discussed at a meeting in Algiers at the end of September.
The story took on a new life when Russia and Saudi Arabia announced that they had signed an agreement supposedly to stabilize the oil market. However, they didn’t say how they would accomplish the goal. Iran appeared all for the deal, as long as it didn’t prevent them from ramping up production to pre-sanction levels.
The fact that Russia and Saudi Arabia were pumping crude at record levels while this still awash in crude and global economic growth remains below trend raised questions about the effectiveness of the Russia-Saudi pact and WTI dropped. In addition, US Crude inventories continue to rise.
The intraday WTI technicals are bullish while trading above $43.60/b looking for a break above $48.50/b (the downtrend line from June) to extend gains to the $51.60/b peak. A break below $43.60/b shifts the focus back to $40.00/b.
Source: Saxo Bank
— Edited by Martin O’Rourke