The powerful illussion of central banking

The key market to observe today is EM FX

 

 

 

The "surprise" in the FOMC announcement was that the consensus among FOMC members for hike seems to have moved forward to June 2015 (from September-December). Personally, I think it's more positioning creating the volatility than actual believe in that FOMC projections, for once, should be right!  An excellent example of Fed's lack of reality during the 2008 crisis was released earlier this year and a nice summary was done by New York Times: The Fed's actions in 2008: What the transcripts reveal

 

Please, do not think for one minute that FOMC have any clue about the economy six months from and even less so looking into 2015 – That being the case though the fixed income market traded 20-25 bps higher in expected yield…. And.. we have seen rate sensitive assets like Silver drop pretty hard – trading now around: 20.31 in spot XAGUSD.

 

There is ample room for reversing this sell-off but still the key component to look at remains EM FX – especially the Fragile or even Fragile Eight…..

 

The main story remains that of ASIA's rebalancing and then indirectly the  EM FX though – this chart from Lawrence McDonalds tell a clear story – at least to me…:

 

 

Standard Chart – the EM Asia bank of choice(with HSBC) is now seeing its 5 YR "insurance premium" or rather CDS rise significantly – part of this of course explained by recent defaults in China, but mostly driven by an expected smaller growth/earnings in Asia plus the asynchronic rate setting by major central banks (read: BOE and FED)

 

The first chart(below) shows how the USD vs. EM FX Asia already had moved ahead of the FOMC this week, so now the key thing will be the reaction over the next 24 hours:

 

Silver is a bad sign, but for USD/EM to start a new crisis we probably need both higher US Yield……and some catalyst reflecting the need for weaker FX rates in these countries. A warning signal have been issued as a bare minimum.

 

I remain very positive US fixed income over the balance of the year, but fully expect the fire-works mainly to be in H2 of 2014 when the market, and even, FOMC realize that real recovery is still an illusion.

 

 

 

 

 

The Standard Chart CDS, Silver and USDCNY tells us that powerful trends which have been in place multi year is under pressure. This despite policy makers telling us that "rates will stay low for longer". The reality of course, my main point, is different as this final chart shows you. Short-term interest stopped going down a long, long time ago – an Einstein quote comes to mind (rewritten here): "…for us central bankers the separation between the past, present and future is only an illusion, although a convincing one"..

 

Safe travels,

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
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