There is a cautiously positive tone to markets this morning as traders look toward the Federal Reserve meeting later today.
A decline on Wall Street last night came amidst a session of risk reduction. After last week’s sharp move higher on Treasury yields amidst a heightened sense of risk appetite, peaked by Friday’s remarkable US jobs report, we now see yields pulling lower again. The US 10 year yield has reversed -14 bps since Friday’s high of 0.96% as traders try to figure out the reaction of the FOMC today. The dollar has been flung around like a doll in a washing machine in recent sessions, and is weakening again this morning. If the Fed opts to remain cautious and maintain its extremely dovish position (perhaps even nodding to yield curve control) despite the positive read-through of the payrolls report, we could see the dollar continuing to weaken.
The Fed releases its latest set of economic projections today and forward guidance will be key. The risk rally has been built on the prospect that economies are re-opening but the massive support of easy monetary (and fiscal) policy continues. If the Fed guides for this to continue open-ended, then the structural weakening of the dollar will continue and the risk rally will remain unencumbered to run ever higher. With equity futures ticking higher, yields lower and the dollar also lower today, it seems that this is how markets are positioning.
AUDUSD made a bearish outside day today after taking out the 12/31 high at .7032. I’m looking lower with focus on the well-defined .6685. The center line of the channel shown is possible support near .6855.