Surfing The US Dollar Before FOMC

Today is nothing but a USD game

Today’s key event is the FOMC decision. US stocks and foreign exchange markets are in wait-and-see mode before the Fed verdict (at 1900 BST). The significant dovish shift since the latest FOMC meeting and the soft NFP read in March (below 200K) postponed the expectations for the first Fed rate hike from mid-year to the end of the year. The implied probabilities extracted from the sovereign markets price in the first Fed rate hike by December, versus Jun/Sep previously. This soft positioning in the market leaves room for hawkish readjustment should the Fed sound more optimistic than expected today. The Fed has already lowered by half their policy rate projections in 2015. There is certainly no need to push the normalization expectations further in time as this would only stress out the market unnecessarily. Due today, US GDP growth is expected to have slowed from 2.2% to 1.0% q/q (annualized).

In the FX markets, the technical indicators are muddled; the USD is the major driver of the market. This means, there is a binary bet today: either USD-positive or negative. Uncertain traders will prefer remaining on the sidelines before more visibility on the Fed outlook.

EUR and AUD at critical levels

EURUSD and AUDUSD are now at critical pivot levels as the USD weakness is building stronger before the FOMC verdict. There is potential in either way, the trigger is expected to be the FOMC verdict later in the day. As the market has slowly moved into an oversold USD era, the relatively low USD levels carry the risk of a rebound.

EURUSD tests offers at 1.10+. A hawkish Fed stance should revive EURUSD-shorts and trigger fresh sales to 1.0881/65 (50-dma / technical support). In any other scenario, the EURUSD should extend its recovery with the additional support of positive short-term technical indicators and challenge offers at 1.1080/1.1100.

AUDUSD double tops at 0.8026/28. AUDUSD broke above the 100-dma for the first time since September 2014. In similar AAA risk category, the declining US, Japanese and core EZ sovereign yields fail to compete with their AU and NZ peers. Moreover, the meaningful shift in Japanese pension funds’ allocation to better yielding - yet not too risky - foreign bonds should reinforce the capital inflows into the AUD-denominated assets. On one hand, this carry appetite has the potential to push AUDUSD higher, on the other hand the appreciation in the Aussie revives speculations for an additional RBA cut and should limit the upside. The bearish bias is at risk for a daily close above 0.8000.

SEK rallies as Riksbank maintains the interest rate unchanged

Riksbank surprised the market by not lowering the interest rate from -0.250% to -0.350%, yet announced an extra 40-50 billion SEK worth of bond purchases to boost liquidity and inflation. As knee-jerk reaction, USDSEK tumbled from 8.5367 to 8.4038, drilling down the daily cloud for the first time in a year. The cloud base level signals an interesting entry opportunity for fundamental USDSEK longs. The divergence between the FOMC and Riksbank remains clearly positive for USDSEK direction in the long-run, however the short-term bearish potential in USDSEK depends on today’s FOMC.

Big disappointment on Twitter (NYSE:TWTR)

The S&P500 and Dow Jones closed slightly positive (+0.28%, +0.40% respectively) in New York yesterday, the Nasdaq wrote-off 0.10% following decent losses in European equity markets. Twitter was the buzz in US markets last night, as their earnings leaked early, causing the stock to plummet as much as 24% and be briefly suspended. Full year revenue was revised down, as new advertising strategies had not delivered the expected level of revenue. FTSE, DAX and CAC opened in red territories on broad risk-off before the FOMC meeting tonight.

While the US earnings continue to come in, the impact of company results will be gradually lessened this week by the expectations, discussions and adjustments around the FOMC verdict. MasterCard, Goodyear, Noble will publish results today; Colgate-Palmolive, Exxon, Coca-Cola, AIG on Thursday, Chevron (NYSE:CVX), Moody’s, CVS Health (NYSE:CVS) on Friday.