“Export growth has weakened,” – The Federal Open Market Committee, March 18, 2015.
Stating the obvious usually doesn’t have this kind of effect. Export growth did stagnate in the latter half of 2014 in January and is nearly 3% lower than December. But when those words were uttered in the first paragraph of the statement released by the FOMC Wednesday, fireworks ensued. Markets interpreted those four words as indicative of the Fed’s concern that the U.S. dollar’s strength has put a significant dent in the prospects of the U.S. economy this year.
The FOMC’s meeting this week was the most important in years. Although not a complete shocker in its dovish tone, it nonetheless caught the markets on the wrong foot. U.S. 10-year Treasuries dropped from 2.05% to 1.91% and the U.S. dollar found itself in a freefall.
Several currencies appreciated by 4% or more against the dollar, only to lose half their gains before the end of the day. The euro went from 1.06 up to 1.10 and settled back down to the low 1.08s. Market conditions were being charitably described as illiquid and disorderly.
When you are sitting on an FX trading desk, other – somewhat more colorful – words seem to better capture the true spirit of what was happening. It was a day of very raw emotion that reminds anyone in the action of it that the power of human psychology, especially when it comes to money, is daunting. Our clients could see firsthand the ferocity of the moves.
And all because: “export growth has weakened.” What the Fed did Wednesday was an old-style bursting of a bubble. The U.S. dollar had risen 25% in value from last summer up until Wednesday and speculative long dollar positions were getting a bit extreme.
As we come to end of such a crazy week however, the more important question is whether or not this has really changed anything outside of shaking out speculators from currency positions? That answer is no. We saw that the very next day when many currencies dropped back to where they were before the Fed meeting.
My View: Markets ultimately trade on fundamentals, not emotion. While the trajectory of U.S. growth may be less than forecast, the U.S. is still the best game in town for anyone looking for a return on their money. Our view of a strengthening dollar remains intact.
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