Trade Team Update

Leading up to this afternoon’s FOMC rate decision and policy statement the euro continued to sell-off in addition to commodities selling off as markets were preparing for strong hawkish FOMC statement.

The fact that our market is still waiting for Trichet’s performance on Thursday means that we’re not going to get a whole of information out of the EUR/USD, but I’m getting plenty of information from equities and commodities right now in addition to Fed Funds Futures and the USD Index.

First thing I want to do today is dissect the FOMC statement and tell you what I believe the Fed’s message to the markets is. Then I’m going to tell you what I’m reading within the other markets and how this can potentially impact moves in the EUR/USD in the short-term. Basically you’re going to read my thought process in the best of my ability to put it all on paper.

As far as the FOMC statement is concerned, I’m sure the big question being debated is whether the rhetoric was hawkish or dovish. Well, it was both. What else do you expect from the Fed? They hire brilliant copy writers to craft these kinds of messages that are vague and aloof. That means I need to read between the lines to decipher what the Fed is trying to tell the markets.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports.

That’s a hawkish USD+ comment. But, we know why GDP saw gains and the consumer sector was supported… because the Treasury fired up the printing presses and mailed billions of dollars worth of “free money” to taxpayers, and those taxpayers did exactly as we knew they would – spend, not save, but spend. Overall, this comment is a wash because it’s good news, but we know why the news is good.

Labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters.

Those are dovish USD- comments. We know how ugly the financial markets are, how tight credit is, how nasty housing is, and how the price of energy is. Plus, as I mentioned above we know why growth expanded in the second quarter and why it won’t expand as much in the proceeding quarters. Although these comments are USD-, the markets already know this stuff and there’s no strong new rhetoric to describe how dire those sectors are.

Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

I like this comment. It’s not hawkish USD+. It was this comment that sent equities up and kept the euro from taking another beating (for now). Reading between the lies, this is where the Fed is telling the markets they have no intentions of raising rates anytime soon. In fact, they have no real timeframe on when they’re going to raise rates. They are telling the markets that the 325bps worth of rate cuts still need time to cycle through the economy and through the financial markets.

But, this comment isn’t really going to help the euro much because we know the next bank that is likely to cut is the ECB and that the next bank to raise rates is the Fed. This comment also took down Fed Funds Futures and pushed back probabilities of a Fed hike over the next two meetings. So overall this comment is not going to help the euro much but it certainly doesn’t hurt it.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

These two comments are double-speak and flip-flopping at its finest. First, they tell the markets we have an inflation problem, then they say they expect inflation to ease, and then they finish off by saying they really have no idea what inflation is going to do in the near-term.

This kind of flip-flopping is a wash for the USD. Inflation is real, it’s happening, and it’s not going away as long as the Fed keeps interest rates artificially low and keeps pumping up the M3 money supply. The more inflation we keep importing from China, the more this will weigh on things like the Import Price Index and CPI.

Wall Street really liked those comments. The was the Fed’s way of signaling to Wall Street that they know there’s an inflation problem but they aren’t going to fight that inflation problem with rate hikes any time soon. Wall Street also liked the fact that there was only one dissenting vote, but that was from the biggest hawk on the FOMC, so there’s no real surprise there.

Bottom line is, the Fed’s not freaking about inflation and when you read between the lines you see they are telling the markets their overall main concern is the smooth functioning of financial markets and that inflation is still just a secondary concern but not enough of an issue yet to go into a rate hike cycle.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

And that’s the last of it there… that’s the Fed’s way of telling the markets they are still in control and will stand ready to protect the interests of the U.S. economy and U.S. financial market. This is more of an endearing attempt at the Fed trying to gain back some credibility. Nice try, I still think they suck.

In my view the net bottom line on this FOMC is that the statement is slightly more on the dovish side, but intended to send a message to all markets. The message to equities was that they’re not raising rates, so keep buying with cheap money. The message to commodities is that they’re watching them closely and will keep manipulating to bring their prices down. The message to currencies is that monetary policy is on hold and they’re still not too concerned about the weak dollar, so keep having your way with it, up or down.

Reading markets:

Another reason I don’t spend anytime looking at candle charts and colored lines crossing is because I’d rather focus my eyes and my mind on the global markets as they are tremendously valuable indicators for our market because each of those markets are directly tied into each other.

After the FOMC statement was released the Dow went up and bond yields went up. There was a strong message within the price action of those markets… the message was that money flows were coming out of securities and into equities because the Fed would maintain a dovish stance on rates, would keep money and credit cheap, and would keep Wall Street supported.

That type of message is not very supportive of the USD, however. The problem is the message the Fed sent to commodities. Gold is train wreck right now and is weighing heavily on the euro. The sell-off in gold has been dramatic and has sucked the euro down with it. I’m no gold expert, but that thing is a mess and I’m not sure if the bleeding will stop in the short term.

The issues with oil are very much the same. The latest “excuse” for oil’s sell-off is that demand is down. I’m not exactly buying that reason but how can demand drop so dramatically that in just three weeks time that it would send crude down almost $30?

Regardless of what the reasons are, it is what it is. Crude is weak, it’s selling off and if it keeps selling off the euro will keep selling off. Pretty simple.

So for at least the rest of this week I’m going to keep an extremely close watch on the markets and the market correlated variables to see how their price action is responding to not only the FOMC but especially to how they respond to Trichet.

EUR/USD:

As I’ve said all week, I’m not buying the euro. I don’t care if the angel Gabriel came down with a trade call from God to buy the euro, I’m not buying the euro. I’m selling every rise and I will keep selling every rise.

The only way I’m going to buy the euro again is when I see the momentum to stop sliding goes away and I see commodities turn around and I see the euro’s price action show the potential of gaining some traction to make a move up without getting smacked down by the dollar.

I believe we have more room to fall. Especially if gold and crude continue to sell-off and equities continue to gain. If those two factors work hand-in-hand, there’s not much hope for the euro to rise because fundamentally, the euro is up against the ropes vs. the dollar right now.

I don’t expect any monumental moves because we still have the ECB and Trichet on Thursday. I believe Trichet is going to carry more weight than this FOMC statement. He’s more credible than Bernanke and I believe he holds more power to cause a reaction in our market.

So, until I see what happens on Thursday and listen to what Trichet has to say, I have little commentary on the euro. I’m still bearish and I’m selling any rises.

Be smart with your trades and please do not over leverage.