If you recall Q1 in the United States was all about the bad weather and the restraining effect that was having on economic activity, but that was a terrible Q1 GDP number out of the states yesterday. I am starting to have some sympathy for Janet Yellen’s “catch 22”.
I think out of habit the markets just went up expecting that the Fed would come to the rescue and in many ways it already has so the market may be looking backwards. In spite of clear indications of inflation they refuse to bring forward the date that rates should rise (like the BOE did). We are told the markets are always right but I don’t think that is really true. I tend to think of markets as emotional and inefficient on shorter timeframes. Warren Buffett happily quotes Benjamin Graham and calls it “Mr Market” and says without those inefficiencies he could not make money. Emotion is also the basis of Japanese Candlestick analysis.
So, either Mr Market was wrong when the market went up because “he” forgets that the tapering process continues unaffected and bad news is actually bad news again, or Mr Market is right because he believes the tapering process will be delayed. Up to know we are told by the Fed that barring a catastrophe tapering will continue. From a professional point of view Ben Bernanke initiated QE but he also began to taper before he left office.
Surely Janet Yellen will not want to go down in history as having put her foot back on the accelerator again and caused inflation to get out of control. I am going to assume for now that tapering will continue until the final $15bn in October. I am also going to assume for now that the Fed board members are still interested in raising rates next year. Therefore Mr Market was wrong and inefficient.
So if I am right then so what? Well to me it says EURUSD should continue lower and rallies and sellable. It won’t be simple as German growth is pretty good but nevertheless the ECB is worried about everybody except Germany. It says that the S&P500 should begin its topping process soon and it says that the FTSE is sellable on rallies too. Remember the BOE is further down the road than either the ECB or the Fed. That says to me EURGBP is sellable on rallies up towards 0.81.
It tells me that USDCAD goes on the radar for a potential long trade having come all the way down towards rising multi-year support in the 1.06’s. It keeps me on alert for a good opportunity to buy USDJPY in the 101’s.
Guest post by Gary Corney of www.fxlight.co