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Wednesday will be the FOMC meeting and press conference. It seems like great TV for President Trump to announce his Fed chair that day, ideally at 2:30 PM ET. That would certainly divert the headlines, put the financial media offside, and create maximum confusion.

Whatever the case, the Fed isn’t expected to cut rates at this meeting anyway, so it should be a bit of a snoozefest. What the Fed does between now and May probably doesn’t matter, especially if we get a new chair who starts cutting on day 1.

The market seems to think the path for lower rates isn’t quite as steep as it had been, with the Fed Funds rate by December somewhere around 3.25%, and then that’s it. So the pick is going to have to be someone who leans very dovish to change expectations, because the market knows, just like everyone, that Trump is going to pick a dovish person.

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As a result, the potential for the 2-year yield breaking out and moving higher seems real, with resistance at 3.62%. What seems to stand in the way is a 2-year potentially rising back to 4%. It certainly seems possible, and technically speaking, after the 2-year has made multiple bottoms in recent months and the RSI has started to trend higher.

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Where the 2-year goes, though, may be tied more to oil. With inflation still running around 3% and oil dropping to around $60 from a high in the $120s, this really emphasises the idea that higher oil prices could easily start driving inflation higher again. Which is probably why the chart of oil and the 2-year look nearly the same.

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The BOJ took the “kick the can down the road” path again, opting not to raise rates and, in my view, not providing a clear policy timeline. The only reason the Yen strengthened on Friday was rumors of a “rate check” by the NY Fed on behalf of the US Treasury. This is basically a signal that an intervention could be on the way. Maybe the plan is to try to hold things together until after the snap election in February. It is not clear to me, but it will be interesting to see how things trade once Japan opens again on Monday. 

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The KRW also strengthened materially against the dollar on Friday. There has been talk in recent weeks about the Korean won being too weak, so I guess the KRW took the JPY news as putting it on notice.

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The KRW probably matters more than most would think, given that South Korean investors have built up a sizeable stake in US equities. It is probably one reason why the KRW has weakened so much. An investor in SK has to sell KRW to buy USD to buy US equities. So, if the KRW starts to strengthen at this point, it could begin to pressure this trade, because the FX exposure leaves unhedged investors exposed to potential USD losses.

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Of course, there will be big earnings this week from MSFT, AAPL, TSLA, and META. All four stocks, as far as I can see, are in positive gamma with positive delta positions. Implied volatility generally rises into earnings due to the risk event, so we could be in one of those situations where, unless the reporting company delivers blowout earnings, it may very well be a sell-the-news event, as implied volatility gets crushed after the release and hedges get unwound due to delta decay.

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