48 hours of market madness

It’s been a crazy 48 hours in FX land. A boatload of central bank meetings, intervention, chatter and action. Let’s bring it all together and make sense of the madness.

Starting with the Fed.

The US central bank hiked by 75bps as widely expected and has now delivered three straight 75bps rate increases in their quest to tame inflation. If that wasn’t hawkish enough the dot plot projected further rate hikes and a terminal rate of 4.6% until the end of 2023.

Chair Powell started the press conference by reminding everyone that the message hasn’t changed since Jackson Hole, adding

“We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t”

“Higher interest rates, slower growth and a softening labor market are all painful for the public that we serve. But they’re not as painful as failing to restore price stability and having to come back and do it down the road again”

If a recession is the price to pay, then so be it. The S&P 500 whipsawed before finally deciding that the message wasn’t supportive and falling to new lows:

An early morning rally failed to gain momentum and the market has looked relatively listless since. Higher interest rates generally put pressure on stocks and other risky assets by raising the risk premium. The US 2 year bond now yields a little over 4.1%, and the 10 year bond offers 3.7%.

These assets represent the so-called ‘risk-free’ rates i.e. the rate that can be returned by simply parking cash in safe government bonds. When rates are very low, bonds are less appealing, so it’s not much of a choice.

However, higher yields raise the bar for stocks to attract capital. Investors now have options. Wait it out in the safety of bonds for a guaranteed return or take risk in the stock market and other riskier assets.

The US stock market had been a one way train until Covid. Here’s a zoomed out view of the weekly chart.

The market would pull back to the 100 week moving average (blue line), before continuing higher soon afterwards. Now, the trend appears to be turning. The index is struggling to gain ground and the 100 week moving average is looking more like resistance than support.

And it’s not just the Federal Reserve hiking rates either.

The Bank of England hiked by 50bps, Norway’s Norges Bank did the same, and the Swiss National Bank hiked by 75bps, finally exiting their negative rate period.

USDCHF strengthened after the announcement. A hike of 100bps had been priced by money markets which made the decision a disappointment for the Franc. Pretty surreal considering the SNB’s position as the central bank with the most negative interest rate until very recently.

Turkey also continued with their highly unconventional monetary policy, cutting interest rates from 13% to 12% despite inflation running at 80%! Here’s the USDTRY chart.

The currency looks to be the release valve once again. The biggest news yesterday however was the official JPY intervention. Will it be enough to slow the yen’s slide?

Get the full lowdown here: JPY Intervention - Japanese regulators stemmed the losses, but for how long?