Fedspeak in Focus
Markets continued to trade in tight ranges overnight amid lack of data and official commentary. However, risk markets were generally softer due to the absence of more positive catalysts and we believe this will be an increasingly dominant factor in markets up ahead. For many economies, growth and other data surprises have managed to hold well, but naturally we would see an upward progression in expectations adjustments, which would be a true challenge of the risk rally. With yields also edging higher, the private sector may also need to be accustomed to slightly higher borrowing costs, though with the US enjoying better growth differentials capital flows into the US economy may be able to supplant some of the perceived lack of liquidity withdrawal in the coming months, unless the Fed would beg to differ. Our risk index showed a strong rally in every measure of risk appetite over the past week, but with equity and FX risk premiums (priced through volatility) hitting multi-week lows, the market will need to be on guard for complacency, unless there is an underlying assumption that any volatility would be met with renewed dovish commentary and liquidity provision from central banks. Ahead this week, Fed members will be heavy on the wires to compensate for a rather tame data calendar. Today, Fed’s Dudley will be speaking on the economy at 8:35ET, though we expect his comments to stick to the usual dovish tone given his voting record. Fed Chairman Bernanke will be giving three separate speeches throughout the week, though his Friday comments would be more important as it will be at a more official forum at the Fed conference. The lack of a press conference at the March Fed meeting may have allowed the market to get ahead of itself and the Fed may want to communicate more clearly that deviation from current targets are ill-advised. On the other hand, if such shifts are going to be encouraged, it would add weight to the view that the dollar is becoming a stronger carry currency, and our flow patterns are starting to confirm such shifts, especially as funds are flowing out of traditional ‘risk economies’ and in favour of the US. Overnight EURUSD traded in a range of 1.3143-1.3187, USDJPY 83.02-83.56. The NAHB Housing Market Index is due today.
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