The week started off risk-off and the FOMC has done enough it would appear to support the US dollar, as they hinted at a tightening of their monetary policy. A stronger greenback has pushed the majors down regardless of their fundamentals and even gold which was a go-to safe-haven play succumbed to dollar strength.
After an eventful week where the FOMC taper/rate decision was left unchanged, the US dollar has remained elevated into Friday's close as the perception is that the Fed is becoming more Hawkish and that Wednesday’s statement was all about teeing up the November FOMC meeting. With a strong close for the US dollar today the US dollar index is likely to have gained just 0.05% for the week, which highlights the tight range we’re still trading within.
Federal Reserve remarks given by Esther George in an 8-page statement titled “The Long Return to Normal”, say the Federal Reserve has purchased more than $4 trillion of securities, pushing our total asset holdings to nearly $8.5 trillion dollars. These asset holdings are depressing longer-term interest rates most relevant for households and businesses and thereby are providing a significant amount of accommodation. And, importantly, this accommodation will persist even when tapering is complete.
Raising rates while maintaining a large, long-maturity balance sheet is a recipe for inverting the yield curve, with potential negative effects for traditional banking models.
She is reported to have said the case for ongoing monthly purchases has waned and the criteria for a taper has been met.
In another release, the Senate and House of Representatives will be reading through 2465 pages of the reconciliation bill. Which has 188 mentions of the word ‘Total’ but no obvious subtotal of how much they are planning to spend. The numbers next to the 1456 mentions of $’s are huge. For example, $10,000,000,000 for hazardous fuels reduction projects within the wildland-urban interface; $195,000,000 to the Employee Benefits Security Administration for carrying out enforcement activities; There is a strong likelihood that a vote on the bill happens next week before the new fiscal year begins in October.
Equities started off the week heading lower and the S&P500 cleared some market structure setting up a bearish turn to the post-covid bull market. Since the Fed meeting on Wednesday, most US equities have recovered, though the Nasdaq is still red for the week. The S&P500 is working in ranges of 150 points and has come back up to test the trendline breakdown zone. This level is critical for the bulls versus the bears, as sentiment around Evergrande which instigated the negativity is still very present. Maybe getting worse. It wouldn’t take a lot for the remaining bulls to exit and for the bears to short one of the fastest rising markets on record. There has been a slowdown in fiscal flows since March and this will be reflected in corporate forward guidance. Nike shares dropped today in the pre-market on the news they are cutting revenue outlook. The recent Initial Jobless data could be hinting at a slowdown in corporate profits as labour is one of the largest drains on profits and the easiest to rectify. If this is the case the IJC could continue to worsen.
In today’s strategy video, I described how 72% of retail traders are long the AUDUSD and where the bulls would need to see some buying take place before they had their stops run.
I am glad to report that the penultimate level remained intact, and the bulls have a chance of this working out going into the weekend, though the retracement has been deep. 0.72220 looks vulnerable as there will be a lot of stop losses placed there and it will only take a little bit of bad news to come out of China for the Australian dollar to weaken further.