Daily Market Analysis

Trading Mood Has Lifted but Positions Expected to Tighten Ahead of the Fed

March 22, 2023

So, all in the market is well again? Consecutive positive sessions on Wall Street shows that the ‘damage limitation’ moves by central banks around the globe (e.g., SNB loan pledge for UBS/Credit Swiss buyout, Federal Reserve daily currency swaps) have had the desired effect of stabilising the much fraught banking sector, for the time being at least. In addition, so far this week we haven’t encountered any significant new pockets of credit troubles among the banks, and this ‘no news is good news’ scenario has seen risk-sentiment on the rise in recent days.

But while the mood of traders has lifted, I expect we could see some position-tightening ahead of the FOMC meeting commencing on Wednesday. And this is because market expectations and Fed rhetoric do not always align (think back to Jerome Powell’s hawkish first day of testimony before Congress earlier this month). While I expect the FOMC will still likely raise rates by 25bp this week, the wildcard element will be whether Chairman Powell is quite as dovish in his remarks as traders are hoping for.

The major Asian indices were all on the ascent today thanks to the positive Wall Street lead, with the ASX200, Nikkei, Hang Seng and KOSPI all posting solid gains.

The gold price has pulled back from its meteoric rise (above US$2000 seen on Monday this week) due to a combination of profit-taking and a reduction in safe-haven flows now that markets have calmed in recent days. During Asian trading hours the spot gold price was hovering around US$1940. But while the precious metal has come down from the lofty heights seen earlier in the week, the technical outlook still looks constructive for gold. Though risk-sentiment post the upcoming FOMC will be key in determining whether gold gets back in sight of the US$2k level near-term.

On the currency front, ranges look to be rightening ahead of the Fed decision. The USD will be reactionary to what happens in the bond market post the FOMC, so the fate of the EUR, GBP and AUD may depend on US Treasury yield activity later in the week. Today, the AUDUSD rate remained tucked below the US$0.67 level due to the subdued gold price and expectations that the RBA may take a more dovish approach at their April meeting.

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