We have the Fed meeting conclude tomorrow and the market expect the Fed to be doveish but we don’t think they can be more dovish than market expectations, speculators are heavily short and this points to a potential rally…
Just above 60% of economists in a Reuters poll expect a taper announcement will come in the next quarter. We think it will come quicker than this but if it doesn’t and there is no talk of tapering this is factored in to the price:
“We are still getting markets responding positively to the lower volatility in the bond markets and lower yields, and a sense that inflation will be reasonably temporary so the Fed won’t have to slam the breaks on,” (Kyle Rodda, IG.) The above is a typical quote from the media and we think the market is to complacent about the Fed moving to taper which we will discuss in more detail in a moment…
Firstly, if we look at the 10 Year Note it sold off last week but there was no reaction in the DXY The DXY actually firmed when yields were going down which is heavily bullish for the USD going forward:
Inflation is building and we did have above forecast CPI as we expected last month and its not transitory…
If the Fed say nothing about tapering its discounted by the market but if its on the agenda we would expect it to firm the USD. Fed stimulus is to big and this can be seen in their bond buying:
The Fed need to withdraw from bond buying and need to taper will they really wait until the final quarter of the year? Our view is no and the risk reward favours buying the USD and we have done numerous posts recently on buying the USD pairs on strength – in our view, the USD has limited downside from current levels and could mount a major rally to the upside as the large number of speculators who are short are taken out on stop.
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