stock indices traded sharply higher after recovering all of Thursdayâ€™s after
hours break following the discount rate hike by the Federal Reserve.Equity traders shrugged off Thursdayâ€™s action
by the Fed after realizing the hike in the discount rate was not a tightening
of the Fedâ€™s monetary policy.
Late in the trading session, buyers disappeared and the
equity markets turned negative for the day. Option expiration jitters created a
choppy two-sided trade. All three indices ended up trading flat to lower. A
weaker Dollar next week could fuel another leg up in the indices.
March Treasury Bonds and Notes closed higher on Friday. Oversold
conditions were most likely the major reason for the rally. In addition, bond
traders seemed to be in agreement with the Fed that the discount rate hike was
not a sign that the monetary policy is tightening.
April Gold and April Crude Oil were able to overcome early
downside pressure after the Dollar soared to the upside. The gradual sell-off
in the Dollar throughout the day helped drive both crude oil and gold higher by
the close. The bullish action by both of these markets indicates that
speculators are betting on a break in the Dollar.
The U.S. Dollar Index finished higher on Friday while eking
out a small gain for the week, but the trading action during todayâ€™s session
indicates that it may be overbought. Following a strong overnight surge to the
upside following the Fedâ€™s discount rate hike late Thursday, the Dollar topped
early in the trading session then struggled to stay positive the rest of the
By mid-session it looked as if traders were shrugging off
the Fedâ€™s discount rate hike.Traders
seemed to be treating the action by the Fed as something the central bank had
to do to encourage banks to borrow from the private sector. At the start of
Fridayâ€™s trading session, investors reacted as if the Fed had begun to tighten
its monetary policy. This was not the case, however as the Fed reiterated its position
through the media that interest rates will not rise for an â€śextended periodâ€ť.
To recap the week, 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 did not
reflect a change in monetary policy however despite market reactions and
analyst commentaries to the contrary.Some had interpreted the action by the Fed as a move towards
monetary-policy normalization although the Fed insisted this was 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 over. 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 basically signaled that future rates are more likely to go up, rather than
stabilize or go down.
Some analysts called 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.
Stock traders caught on quickly to what the Fed meant with
its discount rate hike. The strong rally in the equity markets helped drive up
demand for higher risk assets. The Dollar began its topping process early in
the trading session just after the EUR USD bottomed.The Greenback started to break as
profit-takers took over while the Euro turned positive.
The March Euro posted a daily closing price reversal bottom.
This potentially bullish pattern could trigger the start of a near-term
short-covering rally if confirmed on Monday. The first short-term objective was
already reached at 1.3615, setting up a further rally to 1.3656.
A rally through 1.3656 could prove interesting. This will
mean that upside momentum is building which could trigger a further rally to
the last main top at 1.3788. A rally through this price will turn the main
trend to up and set up the possibility of a huge rally back to 1.4011.
This may sound improbable, but there are a record amount of
shorts in the market according to the CFTCâ€™s Commitment of Traders Report. If
some event happens that spooks the weaker shorts, then this scenario could take
place. Last week it was reported that China
had bought Euros so additional buying activity by these two nations could be
the catalyst needed to trigger a short-covering rally. Furthermore, an injection
of cash by the European Union or the International Monetary Fund into Greece
will also drive shorts out of the Euro.
The March British Pound started the day sharply lower after
a worse than expected U.K.
retail sales report. This report was another signal that the U.K. economy was falling further behind the U.S.
economy.If the Euro rallies, traders
may begin dumping on the British Pound. Oversold conditions could trigger a
mild short-covering rally next week before this market moves lower once again.
A rally in the Euro will help support the March Swiss Franc.
This is because it is diminishing the chances of another round of intervention
by the Swiss National Bank. Fridayâ€™s closing price reversal bottom is a strong
sign that the buying is greater than the selling at current levels.
The hike in the discount rate by the Fed has caused Japan
to lose its short-term interest rate advantage against the U.S. Dollar. This
has turned the Japanese Yen into the main carry trade currency once again. The
daily chart indicates the March Japanese Yen is oversold, but the weekly chart
indicates more downside is likely.
The weakening Dollar triggered a turnaround in the crude oil
and gold markets on Friday. The subsequent rally in these two markets helped
rally the March Canadian Dollar to its highest level in 4 weeks.
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