Wednesday, September 17, 2014

The Forex market (and the bookies) expect a NO vote | A cautious U.S. Federal Reserve

For the last two weeks, in the aftermath of the gap down that resulted from a poll published by the “Sunday Times” that weekend which seemed to indicate that more Scottish voters would opt for independence, Cable, or the GBPUSD currency pair, has been in an uptrend channel. As all movements in any instrument that contains the British pound, and many others that do not, are made with an eye to the outcome of today’s referendum, this can be taken as a sign that the market, on balance, now believes that the proposal will be rejected and Scotland will remain a part of Great Britain.

A “Yes” result has always been perceived as bad for Sterling. Apart from the loss of oil revenue to the treasury, the sheer level of uncertainty that would surround the eighteen months that has been designated for negotiations on the practicalities of secession in the event of the referendum being carried would play havoc with the currency.

The tendency in the market in the last two weeks is mirrored in the odds being given by the great majority of bookies on the outcome.

We are out of the market while the referendum takes place as the short-term volatility has the potential to be severe. This type of situation carries unacceptable risk.

A cautious U.S. Federal Reserve

The monetary policy statement and press conference by the Federal Open Market Committee (FOMC) in the U.S last evening has been marked, on this occasion at least, by a sure-footed performance by all concerned, particularly the Chair of the committee, Janet Yellen.

It is not the job of central banks to change the value of their country’s currency. Their responsibility is, rather, to ensure that changes that do take place happen in an orderly manner. Therefore the Federal Reserve has to be extremely careful about the messages it gives, either explicitly of implicitly, to market participants.

In this regard the equity markets seem to have come more to the fore in the committee’s thinking. It is known that there are members who believe that the stock market is not part of the “real economy”, so a melt down here is viewed by them with something close to equanimity (a raising of U.S. core interest rates would be bad for stocks, as much of the buying that has occurred since the introduction of Quantitative Easing (QE) has been with cheaply borrowed money).

Right now the Fed is being cautious about the timing of an interest rate rise. It is still conditional upon employment growth but there is a clear impression that the nature of job creation, in the sense that it is difficult to balance lowly paid jobs with employment growth and the slack in the economy that is the underutilised element of the workforce, is a worry.

The takeaway from yesterday’s statement seems to be that nothing will be decided in relation to the timing of rate rises until QE is finally ended next month and the pattern of events after that can be studied.

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