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What to Expect When Your Expecting (a Fed Press Release) *Coffee Market Edition*

In just a few short hours, the #FOMC (230pm EST) will be making a statement and the markets will be reacting. For people in the #coffee industry (and #commodities), what you need to know is that the overt expectation is for a #bullish #dollar which is #bearish #coffeefutures and commodities. However, that expectation may be subverted. I go over how that can happen below.



The overt expectation is bullish the USD and bearish for coffee and commodities


The basic relationship is that the Dollar and Commodities are inversely related. Since most commodities are priced on the major exchanges in USD, when the Dollar strengthens it makes goods relatively cheaper to buy in USD terms. Translation: when Dollar rallies commodities tumble.


The #FederalReserve policy has a direct and immediate impact on the value of the dollar. In an #expansionary #monetarypolicy situation such as we are in right now, the key change we are looking out for is #tapering.


Tapering is the first step to getting out of expansionary policy (and potentially into a #tightening policy). An expansionary policy is bearish the dollar (and bullish #equities) and so when the Fed shifts policy this is inherently bullish the dollar, or at least less bearish.


However, since the Fed does not wish to scare or disrupt the equity markets. Tapering isn't actually the first step. The first step is to hint at tapering in these press conferences. Then to talk openly about tapering and finally to actually taper. The Fed has been hinting at tapering for a while now, and previously stated that it would be appropriate to start this year, so the market is expecting that they will finally announce tapering.


If they do announce it, in theory, the dollar should rally.


However, the #forex #traders have been expecting this announcement for a while now, so the USD has already rallied in anticipation of this announcement (and equities tumbled). We have rallied months ago and have been in a sideways range for the last 2 months as the market waits for and is disappointed by expectations of tapering.


There are only 2 meetings left this year (1 in Nov and 1 in Dec) so today's meeting is pretty much the last opportunity to announce tapering if it is to start this year. This makes it a high likelihood that today's meeting will be bullish the USD and bearish coffee and commodities.



DXY chart 6 months


Why the Expectation May be Subverted

On a technical level, the Dollar has been trading in a range, and its already at the top of the range. So we will really need some extra oomph to get the dollar to break through to new highs. That oomph will most definitely be provided if we get a very hawkish announcement.


The risk here is that since the outcome is already expected, we will have to exceed expectations. If the press release is not very Hawkish, the announcement may have the opposite effect. USD markets sell off and commodities...(to include coffee) will rise.


I am going to conclude with a bonus for the coffee folks. First, remember that all forex is relational, i.e. one currency valued against another currency is dependent on the relative strength of each currency. Second, as it happens, today is also a big day for the Brazilian Real.


The Brazilian Central Bank (BCB) is also expected to offer a hawkish monetary policy update today. So far BCB policy (rate hikes) have failed to strengthen the BRL, but knowing this, the BCB may decide to go with a particularly hefty rate hike. If they combine a strong rate rise with a weaker dollar (from a more dovish than expected Fed meeting) it could make for a particularly strong brew in the coffee market.


Let me know what you think in the comments or an email!

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