This evening at 1900hrs GMT the meeting minutes from the FOMC’s meeting of 27/28th October will be released. Since the meeting in late October the market has heard speeches and commentary from most board members, on balance the views of most members have been leaning towards a rate move before the end of this year.
In this weeks report I want to take a closer look at the emerging views of the committee members, the economic backdrop, views on a rate glide path and how that will manifest in the FED’s balance sheet and ultimately what the minutes may tell us about the heighten implied probability of rate move at the December 16th meeting and where that leaves us from a USD trading perspective.
While many committee members of the Federal Reserve have voiced strengthening support for a 2015 rate lift off, the principle member Chair Yellen has remained non committal at her most recent testimony in front of congress, Yellen expressed the notion that raising rates in a timely fashion would be the prudent course of action.
This move towards action has been implicit throughout 2015 although the market has continued to be disappointed with the inability of the FOMC to deliver a the last minute. Senior board members Fischer and Dudley have echoed Yellen’s stance in expressing their belief that the US economy now appears robust enough to withstand external global effects growing in line with FOMC projections. This view has been further supported by most members of the committee who appear largely comfortable with the notion of a December lift off. The minutes release tonight with give further colour to the strength and extent of this support.
A further key constituent of the minutes release will be the member’s assessment of the economic backdrop. The policy statement implied a more optimistic outlook than many market watchers had anticipated. Most notable in this part of the policy statement was the FED’s move to look past the near term economic challenges presented by global growth concerns emanating mainly from concerns with respect to China’s economic growth prospects and decline in domestic economic indicators. While the board maintain the need to monitor this situation they didn’t believe that it was necessarily sufficient to delay normalization in US policy this was a significant shift from the September view. It will be noteworthy to see the extent to which this view was held by the majority of boar members.
A pivotal shift between the September statement and the October statement was the inclusion of language that referenced the next meeting as being one in which they would decide whether or not to ‘raise the target range at its next meeting’ this was a significant development from the language in the September statement. The market took this additional language as an indication of a maningful shift in the FED’s view on the proximity of rate lift off. This view was further underpinned by FED’s William’s who commented since the release of the statement that he felt the market wasn’t appropriately pricing the potential for a December move. Implied probability for a December move has since doubled to a 68% pricing for a move in December. Again tonight’s minutes will give further clarity to to the implications of this development in language, the market will also be looking for the minutes to cast light on the glide path of any move, specifically with respect to the FED’s expectations on inflation and its actual performance in coming months.
The final piece of the puzzle that markets will be pawing over the minutes for some clarity on will be the mechanism for balance sheet normalization. The FED has been less forthcoming in detailing the plans for normalizing its balance sheet exposure, the last meaningful guidance on preparation and plans for this was issue just over a year ago. The market will be keen to gain guidance on how the FED will seek to handle the $200bln + of maturities that will fall due in 2016. The market will be looking for further details on how the FED plans to manage these and future maturities. The key clartiy that the market will be looking for is how the FED will seek to reinvest treasuries going forward, the core plan has been to roll maturing bonds in a proportional pattern a the same time the FED receives proceeds, the market is looking for guidance as to how the FED will smooth its buyer of last resort accumulation and move towards more market driven pricing.
Trading Take Away
As is often the case key fundamental news events coincide with price action at or testing key technical levels. The USD is pointing towards a retest of the current year to date highs.
A hawkish read on tonight’s minutes should see price test and marginally exceed the current highs this would set up the price pattern i have been monitoring in the USD and allow for a pullback to test the breakout area ahead of the December meeting, a move at the December meeting would prove the catalyst for push through the current highs, this thrust should prove profitable but most likely short lived as thrust from consolidation tend to be terminal, this technical pattern would map with the fundamental view that if the FED does move in December it is likely to be dovish raise, a topic we will address further in future reports.
So near term the strategy remains the same I am looking for a double top to develop which i will look to play form the short side, monitoring intraday reversal patterns at or just above year to date highs where i will venture short, targeting a retest of the breakout level where i will reassess the price patterns looking to reverse long for a retest and break of highs.
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