Dollar Surges, Chinese Yuan Plunges In FOMC Aftermath

Tyler Durden's picture

In the aftermath of yesterday's key market event, the FOMC's $10 billion tapering and elimination of QE with "QualG", not to mention the "dots" and the "6 month" comment, the USD has been on fire against all key pairs, with the EURUSD sliding below 1.38, a 150 pip move in one day which should at least give Mario Draghi some comfort, but more importantly sending the USDJPY soaring to 102.500 even as US equity futures continue to slide, and not to mention the Nikkei which tumbled -1.7% to just above 14,000 overnight. Perhaps the biggest take home message for traders from yesterday is that the Yen carry trade correlation to the Emini is now dead if only for the time being until DE Shaw and Virtu recalibrate their all-important correlation signal algos.

The other big news overnight was the plunge in the Yuan, tumbling 0.5%, 6.2286, up 343 pips and crushing countless speculators now that the "max vega" point has been passed. Expect under the radar news about insolvent trading desks over the next few days, as numerous mega levered FX traders, who had bet on continued CNY appreciation are quietly carted out the back door. Elsewhere, gold and other commodities continue to be hit on rising fear the plunging CNY will accelerate the unwind of Chinese Commodity Funding Deals.

With all the focus on the FOMC and China, it seems that the developments in Ukraine and Russia have taken a back seat in the last 24 hours. Nonetheless, there are a few interesting developments including a statement from Russia’s deputy prime minister Ryabkov that Russia could alter its position on Iranian nuclear talks in response to pressure from the EU and US over its annexation of Crimea (AFP). The Ukrainian interim PM maintained overnight that Crimea is Ukrainian territory though this comes after Ukraine’s National Security Council said it would withdraw military forces from Crimea in an attempt to deescalate the situation. Meanwhile, the Ukrainian finance ministry said that it would honour payments on a $3bn loan that it received from Russia in December. President Obama mentioned late yesterday that the US won’t take military action in the Ukraine.

Looking at the day ahead, the focus returns to US data including jobless claims, February existing home sales and the Philly Fed survey. The latter is expected to bounce back from -6.3 in February to +3.2 in March.

Bulletin news summary from Bloomberg and RanSquawk

  • Heading into the North American open, and post FOMC, the USD index (+0.33%) trades on session highs, equities and fixed income trade near session lows and US and EU yield curves are near their steepest levels of the session.
  • Later today the Federal Reserve will today release the results of bank stress tests which covers 30 bank holding companies with USD 50bln or more in assets.
  • Treasury benchmark yields holding near yesterday’s highs; yields surged the most this year, led by 2Y-5Y sector, after Yellen said interest rates could rise by the middle of 2015.
  • In her first press conference as Fed chair yesterday, Yellen emphasized that dropping a 6.5% unemployment threshold for considering an interest-rate increase “does not indicate any change in the committee’s policy intentions”
  • U.S. regulators worried that banks and brokerage firms remain too dependent on risky types of short-term funding are weighing new rules designed to reduce reliance on parts of what is often called the shadow banking system
  • China’s yuan slid the most since 2008 in onshore trading after the central bank weakened the currency’s reference rate by 0.18%, matching a March 10 cut that was the biggest since July 2012; Chinese stocks fell, sending the Hang Seng into a bear market
  • Investment banks should have known about forex traders using chat rooms that had the potential to rig currency prices, the head of the U.K.’s financial regulator said
  • Ukraine said it plans to reinforce its eastern border with Russia and withdraw troops from Crimea, ceding control of the Black Sea peninsula as tensions remained high over Russian moves to annex the breakaway region
  • Sovereign yields higher. EU peripheral spreads tighten. Asian equities slide, with Nikkei -1.6%, Shanghai -1.4%. European equity markets, U.S. stock-index futures fall. WTI crude and gold lower, copper falls 1.4%

US Event Calendar

  • 8:30am: Initial Jobless Claims, March 15, est. 322k (prior 315k); Continuing Claims, March 8, est. 2.880m (prior 2.955m)
  • 9:45am: Bloomberg Economic Expectations, March (prior -3); Bloomberg Consumer Comfort, March 16 (prior -27.6)
  • 10:00am: Philadelphia Fed Business Outlook, March., est. 3.2 (prior -6.3)
  • 10:00am: Existing Home Sales, Feb., est. 4.60m (prior 4.62m); Existing Home Sales m/m, Feb., est. -0.4% (prior -5.1%)
  • 10:00am: Leading Index, Feb., est. 0.2% (prior 0.3%) Central Banks
  • 4:00pm: Fed releases Dodd-Frank stress test results
  • 1:00pm: U.S. to sell $13b 10Y TIPS in reopening
  • 11:00am: POMO Fed to purchase $2.25b-$2.75b in 2021-2024 sector

Asian Headlines

China is to release measures to expand domestic demand as soon as possible and will speed up construction projects and other measures to support economic growth after a slowdown in industrial output and investment boosted risks of missing a 7.5% expansion target for the year. (BBG)

Morgan Stanley estimates a minimum loss of USD 4.8bln for carry trades and Chinese over-hedgers for every 100 pip depreciation of CNH. (BBG) This follows the break of 6.20 in USD/CNY yesterday, seen by many analysts as a significant level for hedging products that would require banks to call in collateral. USD/CNY today closed at 6.2286.

EU & UK Headlines

SNB left rates and the EUR/CHF floor unchanged and downgraded 2014 and 2015 inflation.

Absorption of supply from France and Spain failed to lift Bunds, which are lower in tandem with T-notes.

Bunds were also dragged lower by Gilts weighed on by aggressive steepening of the Short-Sterling curve as market participants speculated on the impact yesterday’s overhaul of the pension system will have on in interest rate path expectation. In the Euro-zone Spanish and French Treasuries sold EUR 5bln and EUR 7.96bln worth of bonds this morning which was in line with exp.

Equities

Equities are all in the red following on from the losses seen on Wall Street, with the FTSE-100 underperforming its peers as pension providers remain under pressure following yesterday's move by the UK government to scrap annuity requirement for pension savers.

FX

GBP/USD failed to recover above the 50DMA this morning and edged into negative territory, in tandem with EUR/USD amid a broad based USD strength as market participants in Europe reacted to the FOMC statement. Elsewhere, USD/JPY failed to benefit from favourable interest rate differential flows, with the pair trading in minor positive territory, as EUR weakness stemming from lower EUR/GBP and EUR/USD weighed on EUR/JPY this morning.

Commodities

SocGen has cut its 2014 price forecast for WTI to USD 96 from USD 99, saying prices have under-performed despite strong fundamentals. Sees gold averaging USD 1,180 per ounce in 2014 up from the USD 1,135 previous estimate after the bullish period over the last few months. Despite this the bank remains bearish on gold with 2015 estimates between the range of USD 1,075-1,100. (RTRS)

Russia has threatened that it could alter it's stance on the Iranian nuclear talks in response to pressure from the EU and US over its seizure of the Crimea, according to the Russian deputy foreign minister Ryabkov. (BBG)

BOFA 2014 lowers average 2014 copper price forecast by 2.7% to USD 6,826/T. (RTRS)
- Raises its 2014 average gold price forecast by 13% to USD 1,300/OZ.
- Lowers its 2014 average platinum price forecast by 8.9% to USD 1,554/OZ.
- Raises its 2014 average silver price forecast to USD 20.80/OZ.
- Lowers its 2014 average palladium price forecast by 2.6% to USD 792/OZ.

* * *

The full overnight recap from DB's Jim Reid

You may think the Fed meeting last night was the most important event in the last 24 hours but some might say it was the annual UK budget. In particular there was a 1 penny drop in the price of a pint of beer. So if you're in London then from now on for every 480 pints you drink you get one free. Anyway this means nothing to me today as I'm currently about to board a flight today to Vienna on the first flight out of Heathrow (6am). I was in bed pretty early last night but not before I had a chance to digest the fairly hawkish FOMC meeting even if Yellen did try to sound a bit more dovish in the conference than the results from the committee's collective interest rate guidance. We'll go through the exact details below but it does seem that the Fed are getting more confident in their forecasts and as such are paving the way for earlier interest rates rises. Indeed Yellen did say that the definition of the "considerable time" that may pass between ending QE and the first rate rise could mean “six months or that type of thing”. So the risk is increasing that the Fed may raise rates in little more than 12 months time even if she maybe made that comment off the cuff.

Our positive view on credit in 2014, particularly for H2 has been based on a much slower withdrawal of liquidity than that currently implied by the Fed. As such we have to seriously think about whether to get more defensive on the asset class or whether to agree with the Fed that growth will come back strongly and take the view that this will trump all liquidity concerns. To be fair we did say that H1 would be volatile as expectations about tighter monetary conditions could first intensify. However we felt that by H2, either markets would wobble on this or growth wouldn't come back as strongly as expected and more benign Fed conditions would subsequently return. However it doesn't appear like the Fed will turn as easily as we thought. We'll be publishing an update to our credit view over the next few days so watch this space.

On to the full details of Yellen's first meeting and press conference. As was broadly expected by markets, the Fed continued with its $10bn/month QE taper and shifted away from its quantitative forward guidance. What was less expected however, was the Fed’s hawkish turn in the form of its upward shift in rate expectations and lack of emphasis on qualitative guidance. In terms of rate expectations, 13 of 16 Fed officials said they expected the Fed to raise rates in 2015, up from 12 of 17 officials in December. 2015 median rate expectations were 1.00%, up from 0.75% previously in December. More significantly, the 2016 median expectations jumped to 2.25% from 1.75% in December. In terms of the revamped forward guidance, the Fed did say that its “assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments”. Based on this assessment the Fed think its “appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends” especially if inflation runs below 2%. As we touched on above, in her press conference, Yellen was asked to define what constituted a “considerable time” period to which she replied around six months. Markets took this to suggest that a first rate hike would occur around March 2015, assuming of course that QE ended in the fall this year. Yellen qualified her assessment of what constituted a considerable period by saying that “it depends on what conditions are like”. Despite all this, Yellen maintained her dovishness with respect to several labour market indicators such as the share of long-term unemployed which she thought was still exceptionally high. In terms of wage inflation, Yellen said wage increases are running at very low levels and right now “it’s certainly not flashing”. Only one FOMC member dissented (Kocherlakota) who said that the revised forward guidance weakens the credibility of the FOMC’s commitment to return inflation to the 2% target.

In terms of the market reaction, the Dec16 Fed Funds contract spiked by around 20bp to 1.82% (up a further few bp overnight). With the removal of quantitative guidance, the front end of the UST curve underperformed and curves bear flattened. The 3year UST yield added 13bp though it did rally a bit from the post-FOMC highs and the 10year part of the curve finished Wednesday 10bp higher at 2.773%. In terms of equities, the S&P 500 traded down to a session low of -1.2% but equities found some support towards the end of Yellen’s press conference and the index managed to claw back some losses to close at -0.61%. Unsurprisingly, the yield sensitive sectors such as  utilities (-1.46%) did poorly, as did gold miners (-3.05%) following the 1.9% drop in the precious metal. There was some focus on the EM side of things, given the sector’s jitteriness of late and we saw a number of higher yielding EMFX bellwethers such as BRL (-0.68%) and MXN (-0.96%) reversed earlier gains against the USD. Local LATAM rates markets also came under pressure as investors favoured USD assets (USD index +0.73%).

This morning we are seeing continued weakness in most risk assets but there has been some divergence which we should highlight, as well as a couple of stories from China worth mentioning. The Nikkei opened around half a percent firmer, as a stronger USD spurred gains in the USDJPY cross. But Japanese equities have given up those gains to trade down on the day (Nikkei -1.0% as we type) dragged lower by the yield-sensitive real estate and banking sectors. The more EM focused indices including the KOSPI (-0.9%) and HSCEI (-1.2%) have recorded losses as well. In China, there are three things worthy of noting overnight. Firstly, Chinese equities (+0.2%) are outperforming today underpinned by news that two domestic listed property developers (Tianjin Tianbao and Join.In Holdings) have received approval by the government to issue more shares. These are the first government share-sale approvals to the property development industry in four years which some are seeing as a shift in official policy towards looser controls on the real estate industry. This could also help to alleviate the funding stresses for some smaller property
developers. The State Council also released a statement yesterday saying that it would accelerate the rollout of measures to expand domestic demand.

Secondly, both the CNH and CNY continue to sell off (both are around 0.3% weaker today against the USD) and the PBoC again has set a weaker CNY fix today (6.1460 vs 6.1351 yesterday) with the renminbi now at 12 month lows. Thirdly, in keeping with the continuing flow of corporate default headlines from China, domestic newswires are reporting on the possible bankruptcy of the largest steelmaker in Shanxi, Highsee Group, which failed to repay bank debt of RMB3bn or around US$480m last week (21st Century Biz Herald).

Meanwhile, gold (+0.3%) and 10yr UST yields (-3bp, 2.74%) have unwound some of their losses from yesterday. With all the focus on the FOMC and China, it seems that the developments in Ukraine and Russia have taken a back seat in the last 24 hours. Nonetheless, there are a few interesting developments including a statement from Russia’s deputy prime minister Ryabkov that Russia could alter its position on Iranian nuclear talks in response to pressure from the EU and US over its annexation of Crimea (AFP). The Ukrainian interim PM maintained overnight that Crimea is Ukrainian territory though this comes after Ukraine’s National Security Council said it would withdraw military forces from Crimea in an attempt to deescalate the situation. Meanwhile, the Ukrainian finance ministry said that it would honour payments on a $3bn loan that it received from Russia in December. President Obama mentioned late yesterday that the US won’t take military action in the Ukraine.

Looking at the day ahead, the focus returns to US data including jobless claims, February existing home sales and the Philly Fed survey. The latter is expected to bounce back from -6.3 in February to +3.2 in March.