The Fed is likely to position itself with a “hawkish hold” tomorrow

Outlook

As the Fed begins its two-day policy meeting, we also get April consumer confidence, the Chicago  PMI business survey, the Dallas Fed April service sector survey, Q1 labor costs, and Feb home prices. Nothing here to change any minds. Canada reports Feb GDP today, likely up 0.3% after 0.6% in Jan and 1% in Q4, which had been a recovery from contraction in Q3. 

The Treasury announced it will need to issue more paper than it had expected, which sent a shiver down some spines. But the 10-year is steady and currencies seem to be de-coupling somewhat from the yield differential as hope for a Middle East truce promotes risk appetite.

Forecast: The Fed is likely to position itself with a “hawkish hold” tomorrow after a full quarter of data indicating we are not in the last mile. Normally such an outlook would favor the dollar but not this time, when it’s already fully priced in. Instead, gains in equities and commodities are pushing risk appetite, which automatically subtracts from the dollar. See the dollar index chart in the Chart Package. We may be in one of those awful periods of corrections of corrections that is resolved only when something Big happens or when traders become exhausted. To see a good example of alternating corrections, see the USD/CHF, practically sideways and all but untradeable. 

Intervention Saga: We have to wait almost a month to get the official data on intervention, but just about everybody believes the big dollar/yen move was, indeed, official intervention. The WSJ reports “Data released Tuesday by the Bank of Japan suggested the intervention amounted to tens of billions of dollars. The data showed a sharp projected drop in commercial banks' yen deposits at the central bank. Analysts said that probably reflected banks giving up yen to buy dollars from the government.

“Masato Kanda, who is in charge of currency intervention as vice finance minister for international affairs, said Tuesday that Japan was ready to act in the foreign-exchange market 24 hours a day. “It doesn’t matter whether it’s London, New York or Wellington,” He declined to say whether the government conducted yen-buying intervention on Monday.”

It’s a little interesting that the FT doesn’t bother to update the intervention story from yesterday. But Bloomberg cites Capital Economics, which says “the price action has many hallmarks of direct intervention despite the absence of confirmation. Whether today’s swing in the yen is indeed the result of an intervention or another ‘rate check,’ it effectively turns the 160 level in the USD/JPY rate into the new ‘line in the sand,’ at which the MOF will aim to limit further yen depreciation. In the short term, there are some factors that work in its favor: With the Japan holiday-shortened week, liquidity... will be lower than normal, meaning that a given amount of intervention is likely to go further.”

The supposed yen intervention has now aroused the idea that China could devalue the yuan, too, despite zero evidence of any such thing except the overvalued yuan/yen. As far as we can tell, the symbol for both is ¥, so the abbreviation would be ¥/¥. See the chart from Bloomberg. We guess this is speculation by folks with too much time on their hands. It lacks plausibility. In other words, poppycock.

Reasons for the Fed to cut rates:

Avoid embarrassment from getting inflation wrong twice

Normalize the yield curve

Head off any recessionary tendencies

Help housing via mortgage rates

Help banks rollover commercial property loans

Help the stock market

(Help the current White House)

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