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Asia-Open: July FOMC a convincing September curtain-warmer

Market Analysis - 6 Min Read Stephen Innes | 30 Jul 2020

US equities were stronger Wednesday with the S&P up 1.2%. The Fed was in line with expectations, though that also meant a reiteration of the need for further monetary (and fiscal) support.

It wasn't exactly the most riveting FOMC of recent times after the Fed let the cat out of the bag late Tuesday by pledging to extend its emergency programs, but it still managed to dot I’s, cross T’s and out-dove even the market’s most dovish expectations. 

Investors liked what they heard from Chair Powell. Indeed, this is a Fed that appears to feel the pulse of the economy despite the meeting coming in line with expectations and offering no new policy announcements. However, it did provide a suitable curtain warmer for a more resultant meeting in September. 

The FOMC statement was mostly unchanged, except for the inclusion of a factor that underscored the gravity the evolvement of the virus would have on the economic outlook – a theme that was reinforced in the press conference as the Chair noted that there’s evidence that the pace of the recovery has slowed since mid-June due to virus concerns.

For me, the Fed's view can be summed up in the response Powell gave to a question about the need for additional fiscal and monetary support. The political message to Congress came through loud and clear as Powell said those people would struggle to pay their bills or even remain in their homes. 

I can't recall a Fed Chair even remotely as forthcoming in telling Congress to quit squabbling as the need for fiscal stimulus is paramount to complement the Fed’s "do whatever it takes" mantra, mainly to avoid a double-dip recession. Indeed, it’s the Artful Dodger no more. 

But make no mistake: this is a Fed in control that knows there’s a limit to what the FOMC can do for the economy. It can influence the markets and adjust the wealth distribution of investors and ease the burden on borrowers, but they cannot directly impact incomes for the majority of folks. The current situation is all about money in consumer pockets, which is precisely why fiscal policy is so much more important.

But, at the same time, the Fed maintained the line in its formal statement that asset purchases will continue at "at least" the current pace. While that's no change from June's language, it underlines that if the Fed were to make a change, it would be to increase the extent of accommodation rather than dial it down. In other words, they’ll do what it takes to make sure the bears won't snatch defeat from the jaws of victory.

The Fed is not offering forward guidance in the conventional sense. However, it's undoubtedly nodding very emphatically to its fear of the gloom still to come while holding back on his big bazooka when they roll out a new monetary framework. But by no means is this an open invitation to strap on risk in an unbridled fashion as Chair Powell knows the August nasties are coming. 

However, I do look at these proceedings through a more bullish lens.

The recent surge in virus cases and the reimposition of some lockdown control measures will moderately slow the economic recovery in the near term. Assuming virus developments don't prompt the reimposition of widespread control measures, we should expect the global economy will continue to rebound while the US recover to get back on track in March. 

So the FOMC July inactions can be very well lined up to the idea that the Feds don't want to increase the sugar drip right now as their guidance is holding the markets in balance while preferring to wait until September to top up the punch bowl when consumers are hopefully more mobile, instead of turning up the drip when folks are taking refuge in the safety of their apartments.  

Forex markets

Wednesday Fed meeting lived up to its expectations as a critical curtain warmer ahead of the FOMC's big guns getting rolled out in September when the new monetary framework gets released. 

With the leading market risk event now in the rear-view window and the Fed keeping the door ajar to further dollar weakness, traders were initially content to go along their merry way to sell the dollar. But with the EURUSD struggling to break 1.1800 and gold failing to set new highs, the road to currency and gold market nirvana could be a little bumpier as it will probably come down to data divergence, rather than a policy transmission shift, that will push the EURUSD to 1.2000 and gold above $2,000.

Generally after a post, the FOMC move trader will take note and study the data and formulate options on recent price actions across several markets. Most of these readings this morning are a bit dovish and crowded, but all closely correlated. The worry into month-end rebalancing is if one gives, all of them are liable to buckle. 

The month-end is tomorrow, so it could be reasonable to assume the USD could rally into the month-end. The EU equity market has outperformed US colleagues and gold to slide as bullion has outperformed the S&P 500 this month. Keep in mind this is an imperfect science and all loosely based on risk parity propensities. 

After month-end, and with Zero hawks on the board, the markets will probably lean towards the well-held adage that when the Fed is in an easing cycle, market reaction to Fed meetings tends to be on the dovish side, even when the market goes in with dovish expectations.

But it does take two to tango (EUR+CNH) and the Chinese Yuan strengthened in the New York hours as the Fed’s dovish nod lent support Asian currencies. Similarly, the Ringgit is veering for a weekly 4.24 post FOMC target, primarily encouraged by the broad-based dollar weakness and continuing evidence of oil price stability. 

Today, local FX traders will be looking to trade the Won as South Korean data in the form of department store sales will give investors better insight into consumer activities in June.

Gold markets

Reuters reported that Chinese regulators are trying to temper China gold fever. 

As we alluded to during the recent ramp to $2,000 (futures) it was all in the price action and easily visible as recent SFE opening salvos on Monday, Tuesday and last Wednesday showed China's retail army of traders caught a case of gold fever, spurred on by the deepening rift between the United States and China.

Still, this is unlikely to have any real shift in the longer-term prospects for gold. And to borrow a horse racing betting analogy: when you have the perfect trifecta of the Fed policy geared towards depressing real 10 year yields, the US dollar status a reserve currency in question, and the CV-19 headline reels continuing to spin, it doesn't get much better than that for the longer-term gold prospects. 

For more market insights, follow me on Twitter: @Steveinnes123 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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