Long−end of Treasury Complex Reacts Negatively to Fed Statement

James Hyerczyk from ForexHound.com at 12/16/09

Stock indices managed to eke out a small gain after the Fed left interest rates alone but offered more details as to how it plans to exit its stimulus programs.  Although the Fed said the employment situation was improving equity traders failed to take notice and instead focused on the thought of higher interest rates.  Stock indices weakened shortly after the release of the FOMC announcement when buyers failed to show up.  The charts indicate that the way of least resistance is down with 1096.75 the first target for the March E-mini S&P 500.

The thought of higher interest rates helped pressure the Treasury complex with the long-end of the market taking the brunt of the selling. With the Fed slowly exiting from the asset purchase business, longer-term yields will now be allowed to rise.  This put the pressure on the March Treasury Bonds.

February Gold finished sharply higher.  The weaker Dollar had little to do with today’s rally.  Although the Fed implied that inflation was not an issue, yesterday’s uptick in PPI started the rally this week.  Oversold factors could be contributing to the strength and there is always the possibility that central banks are buying again.  The chart indicates a rally to $1155.50 is likely.  This would complete a normal 50% retracement of the recent decline. 

Stronger gold and a weaker Dollar helped support March Crude Oil today.  Speculation, however, that the economy was turning around may have been the biggest contributor to the rally.  Traders could be anticipating an increase in demand, now that it looks like industrial production is turning positive.  Technically, this market is trading inside of a retracement zone.  A close over 75.53 will be a sign of higher prices to follow.

The U.S. Dollar erased earlier losses after the Federal Reserve released its monetary policy statement.  The Dollar turned higher after trading most of the day lower after the Federal Open Market Committee offered more detailed plans to remove excess liquidity from the financial system. 

The Fed also offered commentary on the economy, saying that deterioration in the labor market is “abating”.  This statement is a reaction to the decline in the unemployment rate earlier in the month from 10.2% to 10.0%.  The Fed did reiterate, however, that it will keep its benchmark interest rate at a historically low level for “an extended period”.

Bernanke and his friends also said “Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth and tight credit.”  This statement can be interpreted to mean the Fed still wants to see people getting jobs, consumers spending and banks lending money.

The March Euro erased its earlier gain after the release of the FOMC statement.  This move was short-lived causing a two-sided trade into the close.  Technical issues could help support the Euro over the short-run, but investors are still monitoring sovereign debt issues in Spain, Portugal and Greece. Any new bearish developments regarding Euro Zone debt issues could pressure the Euro.

The March British Pound held on to its gains after the Fed released its monetary policy statement.  The British Pound was buoyed this morning by a better than expected initial claims report.

Profit-taking and overbought technical conditions helped support the March Swiss Franc most of the day.  Shortly after the Fed announcement, the Swiss Franc weakened, but thin buying interest led to a quick turnaround.

The Fed news did very little to the March Canadian Dollar, which remains rangebound.  The Canadian Dollar received most of its support the strong rallies in Gold and Crude Oil.  Continue to look for a range bound trade.

The March Japanese Yen remained rangebound although the Dollar strengthened versus the Yen after the Fed announcement.  With the Fed outlining its exit strategy, Japanese interest rates are once again becoming the lowest in the world.  This is helping the Dollar gain against the Yen.