Market mood sours ahead of FOMC meeting

China’s official April PMIs missed expectations and came in lower than the March survey figures, with the Manufacturing PMI barely in expansion territory at 50.1 and the non-manufacturing dipping slightly to 54.3 from 54.8 in March. The private Caixin Manufacturing survey dipped back to 50.2 from 50.8 and missed expectations for 50.9.

In Asian FX, the USDCNY rose slightly, and the Asian exporters were generally offered, led by an explosion lower in the KRW, where USDKRW has broken above a significant chart level around 1,145. 

Adding to the weaker sentiment overnight from Chinese surveys, Google reported a much slower pace of ad revenue growth than expected, and shares were hit for steep losses in aftermarket trading after closing at a record high yesterday. In FX, the weaker risk sentiment generally weighed on the G10 smalls and boosted the yen, though the trading ranges were well short of dramatic.

Anticipation of the Federal Open Market Committee meeting tomorrow is hardly at a fever pitch, but the Fed’s ongoing shift to a more accommodative stance is a key driver across markets and the meeting, even if it fails to produce any notable change in the statement and guidance, is a critical event risk as it tests the market’s conviction. Two things I find of interest: first, the USD failed to sustain a fall after the very dovish March FOMC meeting and even managed to surge last week despite the general anticipation that the Fed is moving toward more accommodation – this suggests that a more dovish than expected meeting tomorrow isn’t necessarily a USD negative beyond a kneejerk reaction.

Why is that? The answer may be that difficult-to-measure (and understand) liquidity issues are at the heart of what is driving the USD direction here more than traditional rate spreads considerations, etc. Second, who is to say that the Fed isn’t already behind the curve – after all, policy acts with a nine-12 month lag, so the economy is still  feeling the effect of the Fed’s tightening through December 2018 and will be doing so for as much as another six months or so. Over that same timeframe, the sugar rush of the Trump tax cuts will also wear off. This is the 2007 analogue (read: a brief rally as the Fed is seen cutting rates, just as was the case after they did so in September 2007 before understanding the scale of the financial crisis) rather than the 1998 melt-up parallel.

Trading interest

• Long USD via GBPUSD, AUDUSD shorts and USDCAD longs.
• Testing long JPY waters with AUDJPY shorts as long as it's below 79.00.
• Long EURSEK as long as it remains above 10.58.

Chart: USDJPY

USDJPY is pushing lower on the weaker sentiment overnight, a theme that may extend if risk sentiment worsens from here and US long yields dip further. This partially confirms the recent bearish reversal, though nothing starts to break down more profoundly until/unless we start working down through the sub-111.00 prior pivot lows, which also coincide with the Ichimoku daily cloud level.