Janet Yellen is priced in, but not fully

  

The way things work in trading in general, and in Foreign Exchange trading in particular, is that market participants attempt to anticipate the events that will have a bearing on the direction that rates will go. As no one can foretell the future, we must all rely on probabilities. Thus, when the favourite for the position of US Federal Reserve chairman to succeed Ben Bernanke, noted hawk Larry Summers, decided not to go ahead and noted dove, Janet Yellen, was nominated in his stead, analysts felt justified in deciding, on the basis of probability, that the end of Quantitative Easing (QE) might not, after all, be as close in time as was originally thought.

So they bought treasuries, driving down yields and therefore interest rates, which tended to weaken the US dollar. Difficulties in the US Congress, which resulted in a partial government shutdown and the threat of default in the middle of this month, also tended to reinforce the idea that QE would be around for a bit longer.

It is in the nature of trading that these things become reflected in price very quickly. In general, if you have to wait until you read about a market moving event in the mainstream media, it is already too late for you to profit from it. The major players will have already acted.

But Janet Yellen’s nomination is not, by any means, the whole story. For one thing, her appointment must still be confirmed by the Senate Banking Committee. That is why the place of a noted dove at the head of the Fed, while substantially already in the rate, is not fully priced in.

But the largest caveat to all of this is that, Janet Yellen or no Janet Yellen, QE is heading for the exit. All her appointment might be able to do is to delay its demise. The current trend in the price of gold is shouting that story loud and clear. It is in what might even qualify as a secular downtrend, and various episodes in Congress, the Fed or on the world stage have only a minimal, short run impact on this tendency:

 And if Ms. Yellen is not acceptable to the Banking Committee, for any reason, the value of the US dollar will be affected immediately in order to completely undo the degree of pricing-in that has already taken place on the back of her nomination.