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Market Highlights:
Greenback Sells Off After Fed ResultsThe Greenback softened following the Fed's sobering outlook, which emphasized that "output and employment has slowed in recent months." The Dollar Index dropped from 81.4 prior to the announcement down to 80.8 afterwards as traders trimmed their long USD positions on the Fed's gloomy position for the American economy. In the last couple of months the Fed has effectively turned 180 degrees in its economic and monetary policy outlook. Not that long ago there seemed to be a quiet confidence about the pace of the recovery as the debate focused on how exactly the Fed was going to wrap up its variety of stimulus programs. Yesterday's tone, however, was quite the opposite, as policymakers attempted to reassure the markets of their commitment to steering the economy of the United States along a steady path. As expected the Federal Funds rate will remain at effectively zero; however, instead of permitting it stimulus programs to expire, the Fed declared it will maintain its balance sheet of over $2 trillion. Bernanke & Co. noted that, as mortgage bonds currently held by the Fed matured, they would be reinvested in a variety of vehicles, with emphasis on US Treasury Bonds in the two- to ten-year range. One caveat highlighted was that it would not buy securities which were in high demand or of which it already holds large concentrations. Dollar Hits 15-Year Low Against Yen OvernightThe Fed's plans to reinvest funds from mortgages in Treasury Bonds drove yields down, which in turn fuelled the JPY. After taking out option barriers at 85.00, the USDJPY hit a new 15-year low at 84.72 overnight. Finance Minister Noda and other key policymakers from the Japanese government attempted to talk the currency down, though with no success. As the JPY rallied overnight, risk aversion took hold of markets. By the bell in Asia the Nikkei has dropped 2.7% and the ASX gave up 1.88%. As European trading wraps up, the picture is no brighter, with Germany's DAX having retraced 1.70% and the FTSE having shed 1.57%. Taking their lead from faltering global securities, currencies retreated against the safe haven appeal of the USD and the JPY. At the time of writing most of the crosses have given up all of the gains garnered from the Fed announcement and then some. USD and CAD Trade Balances Miss MarkThe Trade Balances for the month of July were weaker than expected on both sides of the 49th parallel this morning. The US figure penciled -49.9 billion when -42.0 billion was expected and the Canadian number was -1.1 billion versus a call for -0.3 billion. In the US, the larger-than-expected deficit was attributed to a surge in consumer goods from China, which is likely to put added pressure on China to allow the Yuan to appreciate more aggressively. On the export side, there was a 1.3% drop, led by materials, food, industrial supplies, and capital goods. The number inked in Canada is more concerning, and could be indicative of things to come. Attributed to a plunge in exports, industrial goods and materials, the narrowing trade surplus with the United States seems to be the real bear in the room. The trade surplus with the United States, which is un-questionably Canada's largest two-way trading partner, narrowed to C$3.03 billion from C$3.45 billion in June. As the US recovery falters, the demand for Canadian products is likely to decrease; the Trade Balance is one of the best ways to observe that in action. The concern in Canada is: given the reliance of the Canadian economy on American demand, what will be the full effect of weak economy south of the 49th parallel? Have a great day! By David Starkey, FX Trader,
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