FOMC Disagreement Likely To Yield No Policy Changes

The ammunition that the Fed claims to have will likely stay in storage for now. David Rodriguez of DailyFX says that the disagreement within the members is likely to yield a unified message but no action.

Mario Draghi will likely want to build credibility and skip a rate cut. And what about the credibility of the Japanese authorities with the recent intervention? Rodriguez provides answers to these questions and more in the interview below.

David Rodriguez is a quantitative analyst for DailyFX.com, specializing in statistical studies in currency trading markets and algorithmic trading systems for the Managed Accounts Programs offered by parent company, FXCM. He holds a degree in Economics from Williams College with heavy emphasis on quantitative methods and began trading financial markets in the tech boom and bust of 1999-2001. Since then, David’s primary focus has shifted from equities to currency markets, but he continues to trade futures and futures options on a broad range of asset classes as well as currencies.

  1. Do you think that the fresh yen intervention has better chances of succeeding?

The general consensus is that many were waiting for the Bank of Japan to intervene so as to once again go long the Japanese Yen (short USDJPY). Given such market sentiment, it seems increasingly likely that traders will press USDJPY bets. The question is whether the Bank of Japan/Ministry of Finance really have the resolve to continue intervening. We’ve seen several instances in which BoJ intervention was insufficient. This may be a repeat of the same dynamic.

  1. After 8 years, we have a new president at the ECB. Will Draghi cut the interest rates and help the struggling economies or rather continue the tough stance against inflation like Trichet?

I think Draghi’s first real test is to show the markets he’s no less credible than Trichet. In real terms this might mean showing that he really is quite hawkish and defends against inflation at all opportunities. Ongoing fiscal crises obviously complicate this mission, but my gut tells me that Draghi holds a fairly strict line against inflation—especially through the coming months as he builds credibility.

  1. Do you think that the Federal Reserve may introduce new policy tools in the upcoming meeting, or rather take a break?

The Fed continues to claim that they have further ammunition for monetary policy easing. Yet inflation remains subdued and unemployment is stubbornly high, and US central bankers have thus far shown very mixed biases towards further easing. The truth of the matter is that FOMC voters remain in great disagreement and further action seems quite unlikely. The Fed doesn’t especially like giving the markets surprises. Watch for more unified commentary before any major policy shift.

  1. The market still reacts with dollar weakness on positive US figures and with dollar strength on weak US figures. Do you expect this “risk on / risk off” pattern to accompany us for a long time? What can reverse this pattern and get us back to more “normal” behavior?

The correlation between the Dow Jones FXCM Dollar Index and Dow Jones Industrial Average continues to trade near record strength. Fundamentally this makes sense: the US Dollar is one of the lowest-yielding currencies in the world. Speculators have sold it against higher-yielding counterparts such as the Australian Dollar. Thus in times of market stress, traders will continue to close US Dollar-short positions and force short-term rallies.

  1. Recent signs from China have been somewhat encouraging. Will China continue growing relatively fast? Or is the “landing” for China and the Australian dollar around the corner?

China’s growth has remained robust, but it has not-so-subtly slowed down by its own stratospheric standards. Whether it is enough to derail  commodity demand and thereby growth in key commodity exporters remains to be seen. I honestly don’t have a great deal of confidence in official Chinese growth stats. Thus I take all data with a grain of salt and am more prepared to watch price action in key raw materials such as Copper and agricultural prices. Copper has recently sold off significantly from its peaks, but prices remain quite elevated by historical standards. We’ll be watching for any more substantial tumbles.

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