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North American equities managed to snap their losing streak yesterday, with the S&P rallying into the afternoon to close higher by 0.61% after a stronger than expected consumer confidence reading trumped the dismal durable goods data earlier in the day.  The USD was well-bid throughout the session, as the expectation the Fed will scalp another $10bn of asset purchases of their monthly buying spree helped lift the DXY into the high-80s.  After touching a new four and a half year low earlier in the session (albeit by a very small margin) USDCAD spent most of the day waffling in the mid-1.11s, stuck ahead of the conclusion of the FOMC meeting today.

The overnight session began with a bang, with the Central Bank of Turkey showing other central banks how to shock markets properly, increasing the overnight lending rate by 4.25% to 12.0%.  While many on the street had anticipated a decisive and sharp increase in the lending rate as a means to credibly stanch the outflow of capital and the downward spiral of the Lira, the 4.25% hike was far above the median expectation, and sent the Lira soaring in the wake of the announcement.  The real question now turns to whether this level of interest rates are sustainable over the long-term, and while it has succeeded in boosting the value of the TRY, will these elevated levels of borrowing rates choke off domestic demand and throw the Turkish economy into a recession.  So while the massive interest rate hike has made the task of shorting the Lira a very expensive and painful process, which has indeed sent speculative short’s running for the hills, the question now remains if this policy action just delays the inevitable process of deleveraging the large amount of public and private debt.  In the aftermath of the monetary policy decision from the CBT, the Turkish Lira and other emerging market currencies that were initially well bid after the announcement have seen the majority of these gains erased, with the efficacy of the decision causing concern.  In addition, the CBT also mentioned that liquidity would be provided by the one-week repo rate going forward (as opposed to the top of the policy corridor), which makes the effective lending rate actually 10%, not the huge increase the headlines originally reported.  As the optimism in emerging markets fads, once up by almost 4% overnight, the Lira now only sits 0.6% higher against the USD.  

Also capturing the attention of individuals around the world, President Obama held his State of the Union address last night, delivering 12 key executive actions aimed at closing the income inequality gap in the United States.  From urging Congress to raise the national minimum wage to creating a new savings bond encouraging Americans to save more, Obama was keen to take the opposing side (without specifically making mention) of Tom Perkins’ recent musings about the wealthy, vowing to “take steps without legislation to expand opportunity for more American families.”  All in all it was a relatively uneventful SOTU, with the President spending little time on what are considered the important issues (ex. immigration) he is trying to accomplish over the second term, downplaying the rift in Congress between Republicans and Democrats as what is most likely a strategy play in order to keep the negotiations on track.  

Investor sentiment has noticeably waned as we move throughout the European session, with the FTSE, Dax, and Stoxx down by 0.30%, 0.23%, and 0.5% respectively.  The EUR is also marginally weaker this morning, struggling to gain traction after money supply growth figures in the common-currency bloc sunk to their lowest pace since late 2010, growing by only 1.0% in December, a sharp drop from the 1.5% registered in November.  The silver-lining of the EUR-centric economic data was the that private lending managed to hold its ground and remain stable with a 2.3% decrease when compared to the previous twelve months to December, unchanged from the pace of decrease seen in November.  The money supply figures add further weight to our belief the ECB is close to adopting new monetary policy actions, especially considering that Draghi suggested the ECB may be able to buy bank bonds backed by loans to households and businesses (ABS.)  The EUR is sliding lower heading into the North American cross, with EURUSD striking an offer tone in the low-1.36s.

Risk aversion is prevalent before the opening bell, with equity futures erasing all overnight gains and slipping into the red, while the DXY garners bids to push the USD-index closer to the 81 handle.  Hydrocarbons are relatively flat as traders prepare for the Fed announcement later today, as front-month WTI futures slither sideways just above $97/barrel.  The Loonie has also been relegated to sideways trade based on a lack of relevant domestic economic data and the looming conclusion to the FOMC meeting, with USDCAD pinned in the mid-1.11s.  While the spread between Western Canadian Select and WTI has been developing in a constructive manner for the Loonie, the compression has had little follow-through for increased CAD demand, with the market instead focusing on the neutral-to-dovish Bank of Canada, and the pace of unwind for the Fed’s QE.

Looking ahead to the remainder of the session, traders and investors will be keenly awaiting the conclusion the FOMC meeting, where it is largely expected the Fed will look to cull another $10bn from its monthly asset purchases.  The recent commentary from voting and non-voting members of the FOMC have largely been in-line with one another, even with the token doves getting on board, questioning the efficacy of further asset purchases and the potential for the marginal costs to outweigh the margin benefits.  Although it was hard to categorize the December jobs number as anything but ugly, it will most likely take more than one outlier for the Fed to reassess the speed of the QE taper, with further deterioration in the incoming data required before the Fed considers holding off on an additional haircut.  While a $10bn taper is fairly well priced into markets at this point, it is likely we could see a bit of a relief rally in equities should the Fed move in-line with market consensus, with the USDCAD losing some steam on a “buy-the-rumor-sell-the-fact” scenario; although we would argue this would give short USD positions a good opportunity to cover near-term positions, as a status-quo $10bn taper continues to drive a wedge between monetary policy prescriptions in Canada and the US, allowing room for USDCAD to move higher in the short-term.  

Further reading:

EUR/USD Jan. 29 – Steady As German Consumer Climate Jumps