FOMC review 13-Dec; Short EUR/USD (from 13-Dec to 20-Dec)
Stopped out on 20-Dec
Real-Time AmpGFX – sold EUR/USD; FOMC review (Wed 13/12/2017 2:09 PM MT)
Sold EUR/USD one unit at 1.1775
Comment
Sold after the FOMC.
I have had time to flesh out this email, as the EUR has risen and the USD fell broadly since I sold EUR.
I was waiting to sell the EUR on rising dollar funding costs in EUR/USD cross currency basis, seeing a potential for a squeeze of long EUR positions into year end, and on the back of positive US economic reports and improving confidence in US growth related to tax reform. An obvious risk is volatility around the ECB meeting on Thursday.
I decided to sell after the FOMC. My initial brush was that the lower unemployment rate and higher GDP forecasts point to a firming outlook for the USD, and I saw nothing surprising in the statement.
However, the market has pushed US rates lower in the wake of the FOMC. 2yr swap rates are down 3.5bp (-2bp since the FOMC), and 10-year yields are down 4.5bp on the day (-2bp since the FOMC; – 6.5bp since the CPI data; up 2bp ahead of the CPI).
In working through the detail of the FOMC, it is not clear what the market views as dovish in this statement. Perhaps some were expecting the FOMC to raise its rates forecast next year. But they are still forecasting three hikes in 2018, and the market is still below this expectation (pricing in 58bp by end-2018 according to Bloomberg’s WIRP function).
It is noteworthy that the Fed has met its forecast from the beginning of 2017 for three hikes, and thus it makes less sense to be pricing rates below the Fed’s projections in light of the tax reform bill, buoyant asset markets, and tight labor market.
And the market is well below Fed projections for the second and third year ahead, seeing rates rising barely above 2.0% in three years, only one full further hike from its end-2018 projection, and no further hike from where the Fed sees rates at end-2018; compared to 3.1% median forecast by the FOMC.
The FOMC statement had no substantive changes.
Fed dissenters were the known doves (Kashkari and Evans); perhaps some surprise that there were two, not just Kashkari that should have been expected. The make up of the voting members becomes more hawkish in 2018.
GDP forecast revised up
From 2.1 to 2.5 in 2018
From 2.0 to 2.1 in 2019
From 1.8 to 2.0 in 2020
Unchanged long run at 1.8
This reflects inclusion of tax cuts into the forecast.
Unemployment rate revised down
From 4.1% to 3.9% in 2018
From 4.1 to 3.9 in 2019
From 4.2 to 4.0 in 2020
Unchanged long run at 4.6%
PCE inflation forecasts largely unchanged at 1.9% in 2018 and 2.0% thereafter.
Rate projections median
unchanged 2.1% in 2018 (three hikes),
unchanged 2.7% in 2019,
revised up from 2.9% to 3.1% in 2020, (a more clearly tight policy stance).
Unchanged long run at 2.8%.
The US CPI XFE was lower than expected this morning, but the Cleveland Fed underlying measures trimmed mean and weighted median were both stronger.
Several surveys have shown a significant boost in business confidence coming from the tax plan.
Small business confidence rose to a new high, including a sharp rise in hiring intentions
Republicans are reported to have reached an agreement on tax reform, suggesting that it will be passed before year-end.
With so many distractions, like the Alabama election result, pressure rising on Trump-related to the focus on sexual harassment claims, and the Mueller investigation, perhaps the market is reluctant to buy the USD.
The low wage and inflation outcomes in the last week are probably also holding down US yields.
Note, we were stopped out of our relatively tight s/l on a short gold position. And from earlier in the week on our short AUD/USD position.
Positions
Long a half unit of an XBT derivative at $10,600 (Bitcoin tracker ETN) – no orders
Short EUR/USD at 1.1775; s/l 1.1893; t/p 1.1528