Focus Turns To SNB, And Then FOMC

Markets are generally steady today as traders are cautious ahead of FOMC meeting. Risk markets have rallied much recently on speculation of QE3 from Fed with Dow and S&P 500 making new 2012 high already. But buying momentum is not strong this week as S&P 500 struggles around 1440 while Dow hovered around prior high of 13338.

On the other hand, in the FX markets, dollar's sell-off have extended this week on optimism that eurozone is finally solving the debt crisis. Some volatility would likely be seen today. But the overall technical outlook favors further downside in the greenback in medium-term no matter what the results of today's FOMC meeting are. But which currency would outperform would depends on how risk markets respond to Fed.

We expect the FOMC will make a number of adjustments in its monetary stance, economic assessment and statement language in the September meeting. Chairman Ben Bernanke's comments at the Jackson Hole Symposium raised hopes of further Fed easing. Disappointments in the August employment report due last Friday intensified speculations that the Fed would announce QE3 in as soon as the upcoming meeting.

Our bottom-line is that the Fed would push backward the earliest data of the first rate hike, deliver a more dovish tone in the statement and lower economic projections. We tend to expect announcement of QE3 at this meeting. Otherwise, the Chairman should likely state that further quantitative easing would be implemented soon.

Another major focus today is SNB meeting. Much volatility was seen in EUR/CHF last week as the cross jumped to as high as 1.2155 then engaged in wide range trading. ECB's OMT announcement was certainly a trigger to the volatility. And besides, there were rumors that SNB could raise the EUR/CHF from 1.2 to 1.22.

The relief in eurozone's situation, in particular with Spanish yield back below 6% comfortably, makes it a good timing to raise the floor. But so far, this is nothing more than a rumor and we'll need to see what SNB would announce today.

Earlier in Asian session, the final RBNZ statement from Governor Alan Bollard was largely unchanged from July's. Yet, after looking into details, this one delivered a more dovish message than the previous one. The central bank left the OCR unchanged at 2.5% but pushed backward the timing of the first rate hike to end of 2013, from mid-2013.

Global economic headwinds would eventually affect domestic developments while monetary easing from other major central banks has sent the NZD higher and higher. The market has now priced in a 50% of rate cut from current level next year.