Today's Highlights
That's What She Said
Gauging the Reaction
Today's Forecast
Please note: All data, figures & graphs are valid as of February 15th. All trading carries risk. Only risk capital you're prepared to lose.
Yellen In Charge
Janet Yellen is firmly in the driver seat, controlling not just the US markets but all of the stocks, currencies, and bonds around the world as we all hang on to her every boring word.
What did she say?
More or less the same thing she's been saying since December. She's stepped on the clutch but has yet to shift gears.
Apparently, we're still on track to see three interest rates this year and the next rise could come as soon as March.
What do the markets think?
Though the broad markets have increased the odds on a March hike in response to yesterday's speech, they're still not fully convinced that it will happen.
As of this morning, the markets are pricing in a 32% chance of March Madness. Here we can see the market expectations of a March hike since June of last year.
The odds were about zero in the wake of the Brexit (blue). Then started rising steadily from the US election in early November. They reached a peak of about 32% in December (yellow) when the Fed last raised their interest rates and set the path of 3 hikes for this year.
Now, let's take a look at the US dollar during this same time frame. Remember, an interest rate hike, or even the possibility of a hike, tends to strengthen the home currency.
In addition to all the stuff about interest rates, Yellen also indicated that the Fed will need to start thinking about how to unwind all of the purchases they made in the QE session, but that's the future Fed's problem.
How'd the market react?
The stocks are flying. US indices pushed up about 0.5% further into the all-time highs. Markets in Europe were mostly flat but are opening higher this morning. The Asian indices had a fantastic day with the Aus200 and Jpn225 closing about 1% in profit.
As we saw, the US dollar is king of the road. We can see the acceleration most clearly against the Japanese yen, which surged more than 110 pips...
The euro also fell prey to the buck falling below $1.0585 for the first time since the rate hike in December.
Our clients who are trading EUR/USD had an interesting reaction to this move. Those who were selling got out with profits, while the ones buying held onto their positions faithfully.
According to our dealing desk, 20% of the short positions in the system were closed with profits. As a result, the sentiment is now showing that 73% are buying the pair.
What About Today?
Today we have more Q&A with JY. Yellen will continue to walk the tight-rope and will likely reiterate that while she may be in the driver seat of monetary policy Trump is in charge of the car, the road, and even the weather conditions of the US economy.
The difference is that today she'll have back up. Fed members Rosengren, Harker, and Dudley will all be speaking after Yellen's session in congress.
In addition, we'll have some key inflation data about an hour before the opening bell. The data may not affect what the Fed is saying, but it will affect the mood of analysts and investors going into this eventful day.
If March is really a possibility for a rate hike, the Fed will need to work very hard to prepare the markets for it. Because at the moment, the markets are simply not ready.
If what we saw yesterday was just a preparation of an event that's coming in a month from now, then we're certainly in for a lot more awesome moves going forward.
Disclaimer: This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results. All trading carries risk. Only risk capital you're prepared to lose.