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Citi Explains Why FX Moved So Much More Than Other Markets After FOMC

Tyler Durden's picture




 

The Fed came across as somewhat hawkish relative to expectations, according to Citi's Stephen Englander, but FX made an outsized move against high-beta G10 and EM relative to equities buying and moderate money market moves... here's why...

 

Via Citi's Stephen Englander,

This contrast may be explained by the benign implications of the Fed’s indicated fed funds path for the US and the not-so-benign implications for other countries.


 
In the Figure 1 we see the USD moving up by 0.6% vs. G10 currencies (light blue line)  in the aftermath of the Statement/Press Conference, the VIX (dark blue)  coming off and ending flat, and Dec 2016 eurodollars (purple) selling off.  Equities rose initially but ended flat, like the VIX.

To be clear we see the Forecasts/Press Conference as being hawkish and the Statement as being dovish and to be honest we would not have expected such a dramatic FX move from this combination.

So what played out as hawkish?

1.       The upward shift in the fed funds path and the downward nudge to expected unemployment rates.

 

2.       Even the doves were hawkish. If you count four dots from the bottom, so you are firmly in FOMC doveland, the June dot was  0.5% for end-2015, now it is 0.88% (yesterday’s Dec 15 fed funds contrast was at 0.74%); the fourth dot from bottom in June was 1.75% for 2016, now it is 2.12% (yesterday’s Dec 2016 was 1.77%); the fourth from bottom Dec 2017 forecast is 3.12% (yesterday’s EDZ7 contract suggested a market expectation of about 2.60-2.65%).

 

3.       Fed Chair Yellen had plenty of opportunity to say ‘ignore the dots, only pay attention to the FOMC’s Statement’ , and if anything she seemed to endorse the dots and the forecasts.

 

4.       She was very emphatic in her data dependence and emphasized the ‘approach the target faster, tighten faster’ side

 

5.       She was than emphatic in optimism on either productivity or labor force growth, viewing flat participation as success because of the downward trend in participation rates, so implicitly she was reducing the size of the output gap

So even with an essentially unchanged Statement, the overall impression was very middle of the road, when investors were looking for her to drive on the left.

 

Now why the big move in FX and not so big move in other asset markets?

Consider Figure 2 which gives a schematic picture of what may be worrying FX markets.  Assume the blue curve gives the distribution of economic/financial  market outcomes for the world ex-US, with some risk of terrible outcomes, but most of the risk concentrated in the safe zone. A negative shock such as a backing up of US rates will shift a relatively large part of the distribution into the danger zone. By contrast, the same shock applied to a relatively healthy economy (US or UK, for example, illustrated by the red curve) shifts only a small part of the tail into the danger zone. So even if the Fed comment were equally as hawkish for the US and non-US economies, the onslaught of bad news on China, Japan, Europe etc. may make the outcomes disproportionately bad for them. One bit of evidence is that GBP sold off by much less than other major currencies (although GBP’s lower beta may also be a factor.)
 
The worst combination for currencies right now is to be a high-beta currency  in a slowing commodity-exporting economy  with a  large current account deficit.

 

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Wed, 09/17/2014 - 22:28 | 5228725 Kreditanstalt
Kreditanstalt's picture

All this blather and charts, graphs, explanations trying to quantify the unquantifiable babble of berserk central planners...the more they parse every word, the more they discern each syllable - then each letter of each word - of Fedspeak as having meaning, the less any of it means. 

Just accumulate gold and WAIT.  The math always wins out in the end. 

Wed, 09/17/2014 - 22:56 | 5228802 FreeMktFisherMN
FreeMktFisherMN's picture

The US debt and the Fed balance sheet are what gold track, and last I checked they are increasing. Nothing has been fixed. It has taken countless shenanigans and propaganda to get gold down this far, which still is way above last decade lows. The next crash IMO it won't be the dollar that will be the 'refuge' to which everyone flocks, either. This whole thing is a bubble, from 'high quality sovereign debt' to the dollar. They are in the end game of printing currency to buy bonds, which are future cash flows of said currency. Higher rates will not mean more growth; it will mean creditors balk and demand higher rates commensurate with the risk of holding US fiat notes which are junk status in every sense of the word.

Wed, 09/17/2014 - 23:01 | 5228812 knukles
knukles's picture

Please be careful folks.  You can loose your minds listening to the sales pitches.  Remember, it's all designed to get the buy side to transact.  Aka reap the bid-ask spread plus commissions.
Just think of what CalPers lost in commissions fees and associated costs, real and opportunity listening to bullshite from the hedgies who fed the street with retirees monies, all for fuck all naught.
Be still and listen

Thu, 09/18/2014 - 01:47 | 5229083 Lets Buy The Dip
Lets Buy The Dip's picture

I agree, they are [the fed] are just like protitutes out in the street leaning over in every car they say, and saying "HEY HONEY, LOOKING FOR A DATE?"

They are whores. Check out this chart -> Scary shit  http://bit.ly/1fMcakI

basically the market has been going up with the fed BS money injections. 

Thu, 09/18/2014 - 06:24 | 5229273 ilion
ilion's picture

FX broker expecting a 500-1500 pips crash in GBP/USD today should the Scotts vote to become independent. Article here.

Wed, 09/17/2014 - 23:04 | 5228820 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

???????? Citi, what kind of crap is this? It is simple, QE is coming to a temporary end in the US while it is picking up elsewhere. The End.

Wed, 09/17/2014 - 23:46 | 5228928 Jungle Jim
Jungle Jim's picture

What if someone hasn't got years or decades to *wait*? What if someone has to sell some amount of Ag or Au each month, just to keep his landline telephone and/or Internet connection connected? Just to keep his lights and water on? Just to eat? Or to pay his own or someone else's medical bills?

How much he gets for it at the coin shop -- how many of his or other's bills he can pay -- is most definitely related to the current spot price.

Everybody can't just bury all his PMs in a crockpot like a Leprechaun and forget about them for generations.

Wed, 09/17/2014 - 22:34 | 5228753 Seasmoke
Seasmoke's picture

She could have said we are buying 100 billion of Gold. And Gold will still be sold. Somehow they made it that Gold goes down any day that ends it Y and dove or hawk doesn't fucking matter. I give up. In not giving up one ounce of Gold. But I just give up. I'm not following it any more. In not trying to convince anyone any more. I no longer care if milk goes to $1200 and Gold goes to $5.

Wed, 09/17/2014 - 23:06 | 5228829 knukles
knukles's picture

DO NOT FORGET THAT GOLD IS HIT AROUND EVERY FED MEETING WITHOUT FAIL.
PERIOD
END OF CONVERSATION.
Look at the history of meeting dates and gold price moves.  Like clock work
There are two memes in play.

1) If stawks go up wealth increases for everybody, people spend and the economy grows.  Not now.  Everybody does not own stocks after the 2007-9 debacle.  Nor do many ever want to see them again.
2) Gold must go down around major Central Banker pronouncements and actions.  Gold is the God of Money and it , like religious beliefs, lessons and spiritual tenants must not be allowed to appear in control, for it displays governmental impotence. 

The Windows Must Be Dressed At All Costs

Thu, 09/18/2014 - 06:51 | 5229289 negative rates
negative rates's picture

Ahh the good old bite the fuckin dust attitude, how's it goin over at the love shack? Would you like another try, or, do we already know how that ends.

Wed, 09/17/2014 - 22:44 | 5228776 techstrategy
techstrategy's picture

Or,  you can use the games against them.   Sell all bubble stocks and convert to gold if you have not already.   Tell friends and family to do the same.   Let the Fed and its owners load up on NFLX,  TSLA,  LNKD,  AMZN,  etc while everyone you know accumulates real assets. 

Wed, 09/17/2014 - 23:15 | 5228858 q99x2
q99x2's picture

I'll probably be attending this event at UCLA. Did well with Bitcoin. I think it is free.

Join us for a two-day conference on the past and future of electronic payment at UCLA, September 27-28, 2014 in Decafe, Perloff Hall.

For details: http://internetstudies.ucla.edu/digitalcash/

Today’s discussions about electronic currency often say that the old world of brick and mortar banks, paper cash, and plastic cards is disappearing – and the future is bitcoins, P2P infrastructures, and e-cash served through dotcom companies and mobile phone carriers.

But we have heard these stories before. Like jet-packs, flying cars and trips to mars, digital cash is a relic of the past and a constantly renewed promise from the future. That’s why this conference gathers together humanities scholars, engineers, and science fiction authors, all focused on the past and future of payment. Together guests will explore the historical legacy of payment systems – from conventional cash and credit, to prototype experiments with digital currency – alongside the speculative representations and explorations of science fiction in novels, film and games.

Schedule

Saturday 9/27 – Decafe, Perloff Hall
8:00 – 9:00 – Coffee and tea
9:00-9:15 – Introduction
9:15 – 11:00 – Legacies of Digital Payment
11:15 – 1:00 – Futures and Speculative Currencies
1:00 – 2:00 – Lunch
2:00- 3:30 – Politics and Power in Payment Systems
3:45 – 5:45 – Dangers, Alternatives, and Experiments in Online Currency

Sunday 9/28 – Decafe, Perloff Hall
9:30 – 10:00 – Coffee and tea
10:00 – 11:00 – Glowpearls, Ingots, and Mana – Currency in Other Worlds
11:00 – 12:30 – Brunch with Books
12:30 – 12:45 – Break
12:45 – 2:00 – Digital Cash and the State

Participants: Amelia Acker, Tom Boellstorff, Finn Brunton, Anupam Chander, Steve Crocker, Radhika Desai, Julian Dibbell, Kevin Driscoll, Virginia Eubanks,
Alex Golub, Sandra Harding, Christopher Kelty, Greg Lastowka, Bill Maurer, Jennifer Mnookin, Matt Novak, Ron Rivest, Allan Schiffman, Karl Schroeder, Emin Gu?n Sirer, David Stearns, Lana Swartz, Rachel Lee, Anumpam Chander, Anita Ramasastry, and Sherryl Vint.

Thu, 09/18/2014 - 00:26 | 5228982 Wait What
Wait What's picture

was not aware of this, despite my more than cursory interest in numismatics.

thanks for posting.

Wed, 09/17/2014 - 23:29 | 5228892 teslaberry
teslaberry's picture

so this article is predicting doom again for japan?

ahhh....yes. 

Thu, 09/18/2014 - 00:51 | 5229022 GoldenDonuts
GoldenDonuts's picture

Can someone ... anyone tell me how keeping interest rates near zero "considerably longer" is hawkish?  Especially when EVERYONE and I mean EVERYONE should know that the fed can NEVER allow interest rates to rise above zero because any rate higher than zero bankrupts not only Washington but every government in the world.  West or East.

Gold goes down when she states that they are going to print money to buy bonds so that the interest rate can remain zero?  Exactly how stupid is that?  Let me answer that for you.  Its pretty fucking stupid.

Print more money.  We gotta attack Syria, we gotta attack the guys attacking Syria.  Gotta flatten Iraq again, those uppity pricks are starting to think that its their country.  Get into Ukraine and attack Russia.  Yes that will be bullish for banks.  Send doctors to Africa to help with ebola?  Fuck no send in the military. 

What a fucked up country.  There is no red and blue in America.  Just purple.

 

Thu, 09/18/2014 - 04:39 | 5229197 desirdavenir
desirdavenir's picture

a relatively healthy economy (US or UK, for example

...

Thu, 09/18/2014 - 05:07 | 5229233 jubber
jubber's picture

and so far this morning new record highs continue , Dow 171204 S&P 2007 and Gold just positive!

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