It's interesting that the BoJ , ECB and now Fed policy adjustments are following similar patterns.
BoJ - We had the first mad rush after the first messages of policy change which pushed USD/JPY to 103 and the Nikkei to 16k. Then a couple of months later came an element of doubt as to the speeed or commitment to change and we saw a wash out. Then confidence returned and jpy renewed its general weakening.
ECB - Easing was on the cards until Draghi was "accidently" hawkish at the beginning of June seeing a move driving euro higher until he came back in July with an overtly dovish statement with forward guidance as a strong affirmation.
US - Tapering has been on the cards for a while with the market spending the last couple of months adjusting to it. But then last night Bernanke and the minutes introduced the element of doubt into the timing. The response has been everything you would expect on throwing a hand grenade into a crowded room. It was definately a crowded room but was it really a hand grenade? The tapering trade is still in play, its just a matter of timing and the economy. As TMM have said many times, the central bankers are not going to undo any boost in confidence they have already achieved by choking off liquidity too early. All that happened last night is that Ben gave guidance that the US10yr at 2.80% is too high after previously suggesting that 2.10% is too low. To that extent we expect him to sound hawkish or dovish at either extreme to maintain a range.
If we were to have learned from the ECB and BoJ and the oscillation of expectation around reality then the Bernanke event should not really have been a huge surprise. What was more of a surprise was just how fast market pricing in FX swung to "no tapering". There is blood down "Change Alley" this morning. But the one common theme of all these central bank steerings is the play in the market. On announcement short and medium and long term players all get on board. A full bus. Then comes the element of doubt and the short players are stopped out, the middle term are dubious leaving the long term better levels to get in on the big trade. This leaves the short term players behind and once again running after it. Basically, a positional wash of shorter term positions as "5 minute macro "get taken out of the 3 year macro trade. Don't you love enforced trading discipline?
With that in mind TMM fade the usd drop.
Back to the ECB. After the dovish Draghi was backed by the introduction of forward guidance suggesting no rate rises for a good while yet it looked finally as though we knew where we stood and we were going to have a July free of European issues . But then, in true "European Unity" style, Darth Weidmann came out with this
ECB WEIDMANN: FWD GUIDANCE WON'T STOP RTE HIKE IF INFL PRESSURES.
And with that the European wallpaper splits open again revealing thee huge cracks beneath. What is the point of issuing forward guidance that effectively says "We won't raise rates" if then one of the schizophrenic voices in your head says "unless we do". They are still not speaking with one voice. The ECB cannot function as a single entity when the Bundeathstar constantly decides to go native - it needs to be castrated. We have suggested in the past that as a quid pro quo for the French signing up to fiscal rules should be that the Germans agree that the National Central Banks become mere branches of the ECB ie no longer have national ownership. That is one way to give the Bundethstar "the snip" it needs.
What do we do from here? As hinted at in yesterdays quiz, TMM were looking to lighten up their loads in equities having worn the dip and doffed their cap to Mr Bradleys Siderograph (which, however nutty, nailed the turn in equities and the USD). We have lightened more on this spike this morning. As for new trades we are buying USD/JPY again. looking for 103. It's Abe's turn to "do what's right".