stock indices sold off after Thursdayâ€™s hike in the Fed discount rate. The
immediate reaction by traders was to sell because many traders thought this
move served as a sign that the Fed would begin tightening its monetary policy.
The Fed, however, is emphasizing that this move is not a deviation from its
policy statement that interest rates will remain low for an â€śextended
periodâ€ť.This news is helping to
stabilize the stock indices, leading to a short-covering rally overnight.
The March E-mini S&P 500 is still negative, but trading
well off of its low.The current
short-covering rally indicates that yesterdayâ€™s late session break may have
been overdone.Donâ€™t be surprised if
this market tries to regain the psychological barrier at 1100.00.
March Treasury Bonds and Notes sold off sharply after the
Fed hiked the discount rate, but in a case of sell the rumor, buy the fact,
they both turned positive overnight.Oversold conditions are most likely contributing to the rally. In
addition, bond traders are buying into the Fedâ€™s comments that the discount
rate hike is not a sign that the monetary policy is tightening.
April Gold and April Crude Oil fell sharply after the Dollar
soared to the upside. News that the rally in the Dollar may have been overblown
is triggering some light profit-taking.This is helping gold and crude oil to recover some of their overnight
losses.The direction of the Dollar will
be the driving force in gold and crude oil today.
The Federal Reserve hiked the discount rate 25 basis points
to 75 basis points late Thursday, sending the U.S. Dollar sharply higher. This
buying spree spilled over into the overnight trade pushing the Dollar Index
closer to the all-important major 50% level at 82.63.
The discount rate hike by the Fed was implemented to
encourage banks to borrow more from the private sector. This move does not
reflect a change in monetary policy despite market reactions and analyst
commentaries to the contrary.Some have
interpreted the action by the Fed as a move towards monetary-policy
normalization although the Fed insists this is not the case. As far as the Fed
is concerned, its official statement is that interest rates will remain low for
an â€śextended periodâ€ť.
What it could mean is that the Fed is comfortable enough to
begin hiking rates although it is not a change in monetary policy. In addition,
I think it sends a clear signal that the emergency supply of liquidity that
helped fund the economic recovery is done. It could also be interpreted as a
psychological move by the Fed for investors to get ready for the future course
of monetary policy.This action by the
Fed is basically signaling that future rates are more likely to go up, rather
than stabilize or go down.
Some are calling the move by the Fed a surprise.The timing may have been a surprise, but a
discount rate hike was mentioned twice by the Fed during the last two weeks. In
Bernankeâ€™s testimony to Congress on February 10th, he said the discount rate
would have to be raised â€śbefore longâ€ť.The FOMC minutes released on February 17th stated that a discount rate
hike â€śwould soon be appropriateâ€ť. As far as the timing is concerned, it looks
as if the Fed wanted to separate the hike from its normal FOMC activities in
order to emphasize that this hike was not a change in monetary policy.
The March Euro plunged following the discount rate hike. The
Euro is now taking hits from the improving U.S.
economy, Fed activity and concerns about Greece sovereign debt.Activity in the Greek financial markets is
indicating the country may not be able to borrow unless it receives backing
from the European Union. Technically, the Euro is currently testing a major
.618 retracement level at 1.3483.
Overnight the March British Pound broke through support at
1.5534, taking the market to a 9-month low.The catalyst behind the break is the discount rate hike by the Fed and
fiscal concerns. Investors are worried that the U.K.
economy is falling too far behind the U.S. economy. Some feel the Bank of
England is well behind the Fed. This is probably true as the Fed is beginning
to withdraw stimulus measures while the BoE is still considering additional
quantitative easing moves. At this time, the charts are indicating that
downside risks are increasing.Overnight, U.K.
retail sales fell more than expected.This is a sign of weak consumer demand.
The March Japanese Yen is trading lower. The discount rate
hike by the Fed took away Japanâ€™s
short-term interest rate advantage over the Dollar. This means the Yen is
likely to become the preferred funding currency for carry trades.
The weaker Euro is triggering a sharp break in the March
Swiss Franc.Traders are selling the
Swiss Franc in anticipation of more intervention activity by the Swiss National
The rise in the Dollar triggered by the Fedâ€™s discount rate
hike is putting pressure on commodities such as gold and crude oil.This is triggering a sell-off in
commodity-linked currencies such as the Canadian Dollar, Australian Dollar and
New Zealand Dollar. In addition, the Aussie and the Kiwi are feeling pressure
because the rate hike weakened their yield advantage.
Although the Forex markets are reacting as if the Fed is
tightening its monetary policy, the Fed insists it is still on course to keep
interest rates low for an â€śextended periodâ€ť. According to Fed Bank of St. Louis President James Bullard, speculation that
interest rates will rise this year are â€śoverblownâ€ť.This could mean the rally in the Dollar may
be an overreaction. Donâ€™t be surprised if the Dollar gives back some of its
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Mon 18 Dec
10:00 EZ- final HICP Tue 19 Dec
09:00 DE- IFO Survey
13:30 US- Housing Starts/Permits
13:30 US- Current Account Wed 20 Dec
15:00 US- Existing Homes Sales
15:30 US- EIA Crude Thu 21 Dec
03:00 JP- BOJ Decision
13:30 CA- CPI & Retail Sales
13:30 US Weely Jobless
13:30 US- GDP Fri 22 Dec
09:30 US- GB- GDP
13:30 US- core PCE Deflator & Presonal Income
15:00 US- New Homes Sales
15:00 US- final University of Michigan
17:00 US- early Closes Mon 25 Dec
00:00 Christmas Holidays
Potential Trading Opportunities
POTENTIAL PRICE RISK: Medium Mon--10:00 GMT-- EZ- final November HICP. flash data are rarely changed.
POTENTIAL PRICE RISK: HIGH- Medium Tue --09:00 GMT-- DE- IFO Survey. Key report but usually not a market-mover
POTENTIAL PRICE RISK: HIGH- Medium- Tue --13:30 GMT-- US- Housing Starts and Permits. Leading indicators of activity
POTENTIAL PRICE RISK: HIGH-Medium- Wed --15:00-- US- Existing Homes Sales. Top Housing statistic
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