Strong Economic Data and the Fed

The ISM and Pending Home sales came in stronger than expected. The strong reports come on the heels of the strongest employment report in months. In addition, the US has averted a head-on confrontation with China with respect to its currency policies. The confluence of these events contributed to the already evident risk appetite in currencies and equities. Treasuries continued to suffer and the yield on the 10yr note is approaching a nine month high.

The question on everyone's mind is: how will the Fed react to the positive stream of economic data? We already noted the much anticipated discount rate hike that is expected to take place later today. But for Fed watchers, the big one is, the Fed's "extended period" language. The yield on the 10yr note approaches a major resistance level. We can make the argument that the high probability event is for the yield to hit its resistance level and pull back. There are a couple of scenarios which may lead to lower yields. the more likely scenario is a change in the Fed's language or some other hawkish gesture. It would seem like the market has already made up its mind about the trajectory of the recovery and the Fed will be careful not to fall behind the curve. Only when the Fed's training wheels come off will we know whether the recovery has legs to stand on.

The current environment is favorable for the USD against the euro, British pound, and mainly the JPY. But commodity currencies, CAD in particular, can be expected to get stronger across the board.