Fed Hikes No Guarantee

The vocal minority at the Fed continues to push for rate hikes but it's clear that a majority wants to wait and see some real economic growth and signs of inflation before liftoff. The yen was the best performer last week while the US dollar lagged after 12 weeks of gains. Weekly CFTC data showed a jump in Australian dollar shorts. As yen crosses resume their damage in Asian-Pacific Monday trading following Friday's US selloff, our GBPJPY and NZDJPY Premium trades are nearing their final targets, with 110 pips in GBPJPY, while the AutoTrade-CopyTrade in GBJPY has been closed at 57 pips.  EURUSD, USDCHF,  USDCAD and AUDUSD remain in progress. Volatility rose to the highest in 8 months in stocks as a 40 point intraday rally Wednesday was followed by a 40 point decline today. The yen was naturally the best performer but it failed to gain 100 pips on any cross.

On Monday, the US bond market will be closed for Columbus Holiday, while stocks will open as normal. The bond market is paring back the chance of a rate hike in the first half of the year. Fed fund futures now imply just a 39% chance of a hike by July compared to 59% in mid-September. That could have major implications for the dollar.

Two Fed speakers who usually remain mum weighed in late in the week. Vice-Chairman Fischer said tightening will start only when expansion is well underway. Governor Tarullo emphasized downside risks, especially from abroad.

It's growing increasingly clear that the Fed hawks – Plosser, Fisher, George and Bullard – are isolated and with the first two on that list retiring in early 2015, there are no guarantees. The long end of the Treasury market continues to rally in a sign that hikes may be delayed and that the terminal top may be lower than 3-4% the Fed projects.

Early in the week, the yen is higher once again. There were many headlines on the weekend but what stood out was Chinese officials expressing reluctance on more stimulus.

The new risk in the US economy is the stock market. The end of QE is nearly here and the rout in stocks at the end of last week could begin to damage confidence.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -146K vs -138K prior JPY -113K vs -120K prior GBP -1K vs +3.5K prior AUD -26K vs +2K prior CAD -7K vs +4.5K prior CHF -12.5K vs -12.5K prior NZD 0K vs +0K prior

In mid-September, the net AUD position was at a 16-month high of +50K and it's dived to -26K. That kind of speculative selling pressure can push a currency to overshoot. But when the Aussie had a chance to bounce last week, it tumbled anyway so it's probably too soon for a bounce.