Locked In A Holding Pattern

TUESDAY STILL QUIET - Monday was a quiet day and Tuesday could see more of the same. Tuesday offers a bit of a volatility teaser in the form of UK inflation data and the German ZEW, but this pales in comparison to the event risk that lies in wait into the middle and latter half of the week. I have been talking about the big three event risks for the week over the past few sessions, and tomorrow things kick off with the first of three. The Fed will decide on rates, and it will be less about the actual rates and more about the accompanying monetary policy statement. There has been a shift going on over the past few weeks, with market participants planning for a Fed exit and repositioning accordingly. The US Dollar has rallied on an expected narrowing in USD yield differentials, while risk assets have begun to turn as the incentive of easy money policy begins to fade. And so, there is a lot of risk going into the FOMC and if the Fed fails to show any move further in the direction of policy reversal, this could jolt the market back out of the Dollar and into risk assets.

BEHIND THE SCENES - And yet, we have seen such an aggressive repositioning move in recent weeks, that it almost feels as though there are those that already know the Fed will not disappoint on Wednesday and will indeed deliver a report that continues to warn of exit. Interestingly enough, there haven't been any real signs of such reversal from the Fed (that would warrant these moves), and the latest monthly employment report would have us thinking differently given how disappointing the data was. But perhaps there have been other quieter developments that are getting the market's attention. Over the weekend, the Fed announced a new committee to oversee financial stability, and this could be a message that the Fed is well aware of the risks associated with a bubble in the equity market, and are finally ready to act, to prevent this bubble from popping in a big way.

ONTO THE NEXT ONE - Fed Vice Chair Stanley Fischer will take the lead on this committee and could be looking to build on an already impressive legacy that last saw Mr. Fischer run a successful campaign at the Bank of Israel. So we are more likely to see a tense market that shows all of the readiness to break one way or another, but will hold off for another day and wait for the Fed event risk. Looking beyond tomorrow, we then get the other two major risks for the week. Both the SNB and Scotland referendum are Thursday. I will say that on the strategy front, I have been sidelined in FX and have been looking for the next trade. I liked the idea of selling USD/JPY above 107.50 yesterday, but the market reversed ahead of the desired entry level and I wasn't able to get in. So it's back to waiting patiently for the next compelling set up. I suspect it will come very soon. Hold onto your hats!

Stanley Fischer steps into the spotlight following the announcement of his latest initiative. Via @joelkruger

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