The last time we had a particularly interesting month-end in the FX space was at the end of August, when expectations of a ‘Septaper’ collided with Syrian tensions and knocked ‘long-EUR/long-risk’ trades lower. The tide effectively went out and left some participants exposed in the process. The ‘Septaper’ was about to inflict some damage on the risk trade.
Month-end October doesn’t even come close to the end-August level of intrigue, but price action does suggest that there has indeed been a collision of sorts. Since October 25th, the low-to-high gap in the DXY has been a rally of about 0.90%. This may have taken some by surprise, especially in the run-up to the October FOMC during which one might have expected the USD to ‘err’ more towards the soft side.
If FX is really second-guessing the length of the ‘no taper’, it would suggest that the Fed’s June rhetoric on QE tapering has actually had some staying power – and accomplished something. Perhaps the Fed did want to put a lid on speculative excess whilst still having the freedom to inject QE at the same $85bln/month pace. Either way, something may have been accomplished, and that would not be too bad for a central bank perceived to have massive communication issues at present – or a ‘wild stallion’ like QE3 to tame.
BMO