Explosion Of Big Block Trades in Rates Markets

While The FOMC statement yesterday had a little for everyone (dovish inflationary comments and hawkish employment and balance sheet normalization), the bottom line is that, as former fund manager Richard Breslow notes, Yellen has kicked the can down the road one more time to avoid making any decision before the start of autumn: "they are only human and well aware of the fact that August has repeatedly been a cruel month for upsetting their best-laid plans for September."

Via Bloomberg,

I’ll leave it to others to debate if and when the FOMC will ever learn to communicate effectively with the market. Or the efficacy of what they seem to think is an holistic approach to monetary policy-making by conjuring up convenient and, sometimes, dubious headwinds or tailwinds to justify every halting decision. What they did was very simply kick the can down the road to avoid making any decision before the start of autumn. And it has nothing to do summer liquidity (myth), saving up for Jackson Hole, nor a "somewhat" new interpretation of inflation trajectory and slack in the employment situation.

It’s that they are only human and well aware of the fact that August has repeatedly been a cruel month for upsetting their best-laid plans for September. They bought themselves the optionality they crave, even if they unwittingly paid up for the privilege. It’s always easier to be a free-spender with other people’s money.

So while we wait, what should we be thinking about? First off, they are conveniently forgetting that foreign exchange is a two-sided trading instrument. They’ve frequently complained about the drag from dollar strength. In enacting a policy approach that is meant to stoke inflation from currency weakness they seem to believe that exporting deflationary pressures to the likes of the euro zone or Japan will go unnoticed, unremarked upon and ignored.

It’s certainly been a home-run trade this year to be short dollars but don’t expect the ECB to respond to a hesitant Fed by becoming more aggressive in their tapering rhetoric. There’s going to be a lot more volatility as the market shifts back and forth on handicapping what could easily morph into a currency cold war of “He said, she said”.

[ZH: note how the last two years seems to show that an extreme correlation between USD Index price moves and spec positioning - is spec flow driving USD or vice versa?]

This might show a growing consensus on where things are eventually going. But a word of caution: they can’t be front-run and whether they have a lasting effect will be known only in retrospect when it will have been obvious and not very useful. We could very well be seeing a market-structure change right before our eyes. Something to regale your interns with.

As Breslow concludes, however, despite analysts telling us that the Fed would do nothing yesterday and being proven right, it looks pretty obvious that traders got hurt on the news.

My guess is, rightly or wrongly, once the pain subsides, no one’s deep-seated views will have changed. But navigating the price swings may require a new approach going forward.