- Dollar: Set Your Expectations for FOMC Volatility, Trend
- British Pound Slips after Uneven Inflation Update Unnerves Rate Watches
- Australian Dollar: RBA Governor Says May Cut Further, Even Intervene
Dollar: Set Your Expectations for FOMC Volatility, Trend
The dollar is close enough to significant reversals with the EUR/USD, GBP/USD, AUD/USD and USD/JPY that the upcoming FOMC rate decision has the market’s focus completely locked in. Yet, Taper speculation doesn’t carry the level of market sway it leveraged 6 months ago; and the outcome’s influence on general risk themes has grown more ambiguous. Yet, most important of all for those looking at to this important economic event as a catalyst for something more prolific, immediate liquidity conditions associated to the year-end holiday drain will work against the development of a meaningful and persistent trend. This event can easily tap volatility, but much more than that will be difficult.
In terms of fundamental significance, the turning point in the Federal Reserve’s monetary policy regime from an accelerating stimulus effort to one that turns its trajectory back towards Earth is pivotal. Having led the global effort amongst central banks to first pull the financial system back from collapse and then use the extraordinary measures to promote growth, seeing the US policy authority change tack could alter market-wide sentiment that has built a reliance on the propagation of limitless external support. However, that tectonic shift is one that is to be made by the market-at-large and not necessarily by a Fed decision. Yet, after the policy decision is offered up, we only have three full trading days left before the disruption in the liquidity line with next Tuesday’s Christmas Eve. And, when the break is made, the lull will likely last through the rest of 2013 – a long time for the market to digest the implications of exactly what FOMC policy update means.
As for the event itself (19:00 GMT), this is the last ‘quarterly’ event that will be chaired by Ben Bernanke. We expect a policy decision along with updated economic forecasts (growth, inflation, interest rates) and the Chairman’s press conference (19:30 GMT). The market’s immediate concern is whether the group is prepared to Taper this month or will wait until 2014. The majority still expects the pivotal move to occur March 19 with a lower percentage of support for a January 29. While a hawkish/neutral shift today is the lowest of the three Taper scenarios, there is enough speculation that a significant portion of the market will be caught off guard regardless of the outcome.
‘Taper or no taper’ will be the surface level, immediate assessment.
If there is no QE cut and guidance doesn’t offer a definitive clue to the inevitable first move, the positive risk implications will be limited as the market will find a comfortable outcome to fall back into complacency and exit the market for the quiet holiday period. Alternatively, a taper or explicit timeline will be a little more provocative. However, looking back to the S&P 500’s march higher into the September 18 meeting (where a QE reduction was the consensus, though deferred) tells us the market is not going to reply in a Pavlovian risk-off way. The size of the taper or the pace of subsequent wind down is critically important to building meaningful momentum. The benchmark for follow through, but the requirement for volatility is low.
British Pound Slips after Uneven Inflation Update Unnerves Rate Watches
As we await word on the timing of a long-awaited policy change from the world’s largest central bank, the market is still supporting an aggressive (at least from a relative perspective) outlook for UK rates. The sterling has retraced some of its gains these past few weeks, but there is still considerable premium behind expectations of the BoE’s first rate hike. Unofficial market measures and survey suggest these expectations may be as early as 2014, which contradicts the MPC’s forward guidance. Data is important to feeding or undermining this belief. This past session, Governor Carney spoke a hawkish game, but a flat inflation data caused sterling rumbles. Coming up, we have the minutes and jobs figures.
Australian Dollar: RBA Governor Says May Cut Further, Even Intervene
RBA Governor Stevens testified to Parliament’s economic committee this morning, and the central banker took the opportunity to leverage his ‘jawboning’ effort. In assessing the currency, he said the fall in the Aussie was as expected and that he expected the exchange rate would further drop from the 2013 range. As for what the RBA could do going forward, he said further rate cuts and even direct intervention were options going forward. Foreign demand for Aussie bonds is falling – AUD carry is fading – and these remarks look to feed that trend.
Yen Crosses Pull Back from the Edge,Temporarily at Least
The USD/JPY, EUR/JPY and other yen crosses threatened to break serious levels of technical support this past session. Given the persistence of the crosses’ drive, speculators were ready to buy into the reversal opportunity. However, before the critical sentiment update from the upcoming Fed decision – and the BoJ’s own policy meeting on Friday morning – jump starting such a critical shift in momentum was beyond the capabilities of this thinned market. Meanwhile, the Japanese trade deficit update this morning hit another record – despite the yen’s decline.
New Zealand Dollar: 3Q GDP Figures May Reinforce Rate Forecasts
It may be hard to see around the flashing lights of the Fed rate decision, the New Zealand docket actually offers up its 3Q the GDP reading a little over two hours after the US afternoon news rout. Whether or not this data is market-moving depends heavily on the condition of sentiment after the FOMC decision. However, after the RBNZ Governor forecasted 225 bps of hikes in 9 quarters, this is an important qualifier.
Euro Strength Dependent on Dollar Appeal, Steady Risk Backdrop
The euro-area docket was light, but a Eurozone ZEW investor sentiment survey jumped to 68.3 – the highest reading since February 2004. Meanwhile, Eurogroup officials issued a statement suggesting a €500 million disbursement to Greece had been approved from the EFSF sometime this week. This are notable upticks in the fundamental balance, but the real capital flow will be in the US – EU equilibrium.
Gold May See Fed Breakout Regardless of Risk Trends
In another step in the back-and-forth price action we have come to expect from gold over the past month, the precious metal dropped 0.8 percent Tuesday. A meaningful trend development before the Fed decision was extremely unlikely. However, a more convincing move after the event is much higher. This could be true even if there isn’t the high-level risk response that would stir both equities and the dollar. In this policy decision, we find an assessment in the global stimulus effort. If monetary policy deflates currencies, gold is appealing. If it fades, watch $1,200.