After a few days of expectation, we finally approach the end of the week, and a couple of widely anticipated events. The upturn in volatility today gives some idea of how on edge the market has gotten itself, and a continuation of that looks likely.
Regarding today, between us we have given a comprehensive view of what to expect from the Chancellor, and I don`t intend to go into any further detail. The question we all need answering is will this speech deliver any directional basis to sterling, and the answer is probably no. He will sit down having given the impression of how well the UK has done vis a vis its peers in this recovery, he will have given a couple of sweeteners to the electorate, but no `giveaways` at this stage, and he will impress the fact that the job is only half done, and that the same path of `austerity` needs to be followed for a few more years to cement the recovery. Overall his comments will be supportive for sterling, but I can`t imagine any of us listening to it, and hearing something that will make us immediately hit the buy button!
Tomorrow is different. For me, speculation about the magnitude of the number is fun, but guesswork and I don`t have an advantage in that. What I do think is important, is not where you think the number be, but your view of the big picture implications of its publication. The question is, `do you think that the Fed policy on a taper will be defined by this number?`. If your view is that the overall balance of recent US statistics – even taking into account a big number tomorrow – is not enough to allow a December taper, then you are looking to sell into any sharply bid dollar move on a higher number after publication. If you think that a good number tomorrow will be the final clue that they need to go ahead with the taper, then there will still be value for you somewhere in the days to follow. If NFP disappoints or fails to excite on the upside, then I guess we just fall back into a reluctant dollar drift for a few weeks, with prospects for an early taper disappearing. There is a plain volatility equation here of course to influence trading decisions, with a better figure certainly exciting the taste buds more than an easier figure.
Knowing a bit about the data collection and the volatility of this number, it would horrify me if I thought that Fed policy was decided on such an event, and I am sure that is not the case! So unless you are 95% sure that the case for a taper is already proven, then even a high number should not be enough to prompt a decision from the Fed later in the month.
I have already made it clear that in my opinion the Fed needs to be brave and start to set the agenda rather than follow it, but there is little evidence to convince that will be the case. Disappointingly, I think the chances are that even on a bid figure the Fed will have enough excuses to just kick the tin can down the road some more. Ho hum…
