The Fed is increasing their options while removing Fed certainty. These changes can bring volatility back into the markets on any sign of market turbulence.
The currency market has certainly seen an increase in volatility over the past few days, with the dollar dropping, recovering and dropping once more. This condition is stemming from many market participants trying to price in the unknown. For the first time in years the Fed has pulled the stops on market support with the elimination of "patient" but has also noted concerns about the economic strength of the US recovery. This is causing the market to try to price in something that the Fed has kept out of the overall markets for some time; uncertainty.
The strength of the dollar is definitely going to be a concern for the Fed going forward, as the higher dollar will make the importation of inflation harder to come by, in terms of higher energy costs and core CPI. If the dollar does not significantly decline the US could import deflation as foreign prices become cheaper on a dollar basis. This will cause concern with the Fed as the recovery is still in the early stages, the housing market has not been stellar as f later, and the low inflation rate is skewed by the low participation rate. I would look for the movement of the dollar to quell or heighten any reservations the Fed has about rate increases in the future.
With the Fed expected to remove the 'patient' portion of the language at the end of today's meeting the markets are expecting rates to be increased in the next few meetings. The markets will become volatile, especially emerging markets, and the Dollar is likely to rise. one of the factors to look at in the currency market is what, if anything will be a play against the dollar's rise. For this I would look to the Yen.
The BOJ governors are already predicting a short bout back into deflation, and while they deem that short term, the 2% goal is still a long way off given cheaper oil (which will only get cheaper if the Dollar continues to rise) and stagnant wages relative to the cost of living. While an interest rate increase will increase the amount you make keeping money in dollars the stagnating of the market should the cost of capital significantly rise above the rate of real (after inflation) growth you will see companies reluctant to hire and expand their businesses. This could result in a slowdown in the US economy that could rattle stock markets and lengthen the time the Fed takes for more hikes. Meanwhile Japan which is already struggling to keep inflation up in a slowing global market, could see price cuts strengthen the currency as the policies of Abe start to loose their merits.
This makes for a good opportunity to look into a long Yen position against the dollar (as in the FXY ETF) as a way to diversify out of the dollar exposure you have through US stocks. A good start to the buying opportunity could come from the Fed as early as today.
The bond buying has officially started by the ECB today, purchasing about $65bln in bonds a month from Euro zone countries. The details of the buying program set up some interesting opportunities ahead. The bonds that can be bought are of the public and private nature and will be about equal to the amount the specific countries contribute to the ECB (though not followed on a monthly basis) and the bond purchases stop if the yields on the bond type drop below the ECB deposit rate, currently -0.20%. This could make for some interesting changes in the program and rates should the bond scarcity occur (though this was a scare in the UK and America, and later unfounded). The deposit rates will have to be lowered in order to increase the pool of assets that the bank can buy. An interesting portion of the yield curve to look at would be on the long end. Longer duration bond are more susceptible to inflation rate expectations and will be the first to start pricing in any success of the bond buying program. Should the ECB not focus on longer dated bonds in the beginning of the purchase program they may be forced to move p the duration curve and actually pull bond yields below the future expected inflation rate expectations, creating volatile selling from income derived investors and make it very opportunistic for banks (both sovereign and private) to lend. It will be under these conditions that the real stimulative feel will start to occur.
The Jobs report came out impressive by most accounts (wage growth being the only possible exception) which has shifted asset classes pre market that shows an interesting spin on sentiment. The dollar is up, Utilities down, Financials up, and bond yields increasing. This shows that there is more pricing in of a rate increase sooner rather than later (perhaps more skeptics having their bias proven false). What will be interesting to watch are stock in general as rate increases start to rise, bonds and the dollar seem to be moving in the right direction expecting the US to increase rates in an ever lower rates developed world but what the stock market does will be another factor to watch. With rates looking to go higher I would be concerned about any sustain downside that may creep into the Equity markets, especially ones that have foreign currency exposure. I would look to hedge to the downside with the purchase of a PUT in the S&P, writing covered calls is another options but may limit your hedge to a prolonged downside of a stock you may want to sell.