FOMC may offer few surprises - but market to move anyway?
It’s the meeting after the declaration of open-ended easing from the Fed – the statement itself may offer few surprises, but market positioning could mean the USD moves anyway, particularly against AUD and CAD.
Japan – this is getting too easy…
Overnight, we get more jawboning on inflation from Abe, who tried to convey that his aggressive position on the Bank of Japan is aimed at regenerating inflation rather than affecting the exchange rate, even if the whole world knows otherwise. JPY crosses jumped again as former deputy governor Iwata was interviewed and suggested that the BoJ needs to double the size of its balance sheet to effectively fight deflation. He is considered one of the front-runners for appointment as the new BoJ head. (I heard about this interview second hand, as no English press version of this interview is available, to my knowledge, so I can’t vouch for the veracity of this news item – though Iwata is on the record with very dovish leanings.)
Maximum danger for Euro volatility ahead
The EURUSD took out 1.3500 in early trading, but we’ve got a couple of event risks up later today besides the huge US-related risks, including a 3-month LTRO tender and another Italian debt auction at 1000 GMT that will see 6.5B Euros of 5 to 10 year debt on the block.
Spanish GDP data was slightly worse than expected with an ugly -0.7% QoQ contraction in GDP that takes the YoY figure to -1.8%. Record high unemployment of 26% and a shrinking economy while the EU is effectively experiencing monetary tightening as some EU banks repay some of their 3-year LTRO funding. This is patently unsustainable, but where is the moment of realization on this – post today’s FOMC meeting? Not until the ECB sends an easing signal? An EU political development? Volatility is not going to fade from here for Euro crosses, that much is certain. Maximum danger ahead as these Euro levels versus the USD and JPY are increasingly destabilizing, but not sure if the danger is now, or not until we go even higher – perhaps 1.3800 in EURUSD if today’s FOMC doesn’t stand in the way of anything.
FOMC and all of that
I’m not expecting anything particularly dramatic from the FOMC, particularly after the Fed uncorked open-ended easing just last month, but obviously, we need to be aware that the voting composition has changed – could we see one or both of the “new hawks” dissenting to the new statement (odds maybe 25% of one dissent and much lower for more than that. Bullard is the known hawk in town with George with only slightly hawkish record.) The wildcard possibility on voting patterns is that the extreme dove Evans actually dissents on the dovish side as he calls for NGDPLT – but that dissent probably won’t come until there are worse signs of weakness in the US economy than we have at present.
Dovish/Uninteresting = highest odds
The most likely FOMC statement scenario is one in which there is no real change and we merely see a bland repeat or approximate repeat of the statement, with very minor upgrades/downgrades of the economy’s description. If that is what we get, I would expect the USD remains weak for now – with a sprint higher in EURUSD (assuming nothing pops up on the event risks described above) to 1.3600 or 1.3650 before a new range is carved out. Elsewhere, it would be interesting if a dovish read on the Fed finally puts a cap on USDJPY and whether parity can be maintained in USDCAD in this event or if 1.0500 holds as resistance in AUDUSD.
But is the dovish scenario already priced in such that we see a sell the rumor/buy the fact reaction in the USD or is slight hawkishness already priced due to the most recent FOMC minutes such that the dovish outcome triggers considerable movement?
More hawkish scenarios = lower probability
This is less likely, but any hint that the Fed is watching asset markets (extremely unlikely, but explosive if it’s there) or other comments that significantly upgrade the observations related to employment or more than one vote of dissent on the hawkish side could be considered interesting, as it would generate considerable anticipation for the FOMC minutes and whether dissent among Fed members is spreading.
Don’t forget RBNZ
For kiwi traders out there, don’t forget the RBNZ meeting coming hot on the heels of the FOMC this evening. The kiwi 2-year swap rates have been edging higher and higher lately and NZD remains fairly correlated with this move and with the overall sanguine risk environment. The meeting and any guidance on rates could finally trigger a move through that 1.2500 to 1.2300 zone of support in AUDNZD. In NZDUSD, the action has been extremely choppy, and the combination of the FOMC and RBNZ could mean lots more volatility. A close below 0.8300/0.8325 looks very bearish there, while the obvious huge resistance is up at 0.8450/75 and has been since February of last year.
Besides this evening’s FOMC meeting, don’t forget the ADP employment change data for January out at 1315 GMT and the US GDP data out a bit later (expected at a mere 1.1% annualized – after a 3.1% figure for Q4. I’ve never liked reacting to GDP data as it is real rear-view mirror stuff…)
After the FOMC meeting, the US employment report takes on considerable significance due to the thresholds set up by the Fed at their December meeting and as we’ve had two very low jobless claims readings that may have been seasonal aberrations.
Stay careful out there.
Economic Data Highlights
- New Zealand Dec. Building Permits rose +9.4% MoM vs. +6.0% expected
- Japan Dec. Retail Trade rose +0.1% MoM and +0.4% YoY vs. +0.4%/+0.3% expected, respectively and vs. +1.3% YoY in Nov.
- Spain Q4 GDP out at -0.7% QoQ and -1.8% YoY vs. -0.6%/-1.7% expected, respectively and vs. -1.6% YoY in Q3.
- Switzerland Jan. KOF Swiss Leading Indicator out at 1.05 vs. 1.20 expected and 1.28 in Dec.
- Sweden Jan. Consumer Confidence out at -2.9 vs. -8.8 expected and -12.2 in Dec.
- Sweden Jan. Manufacturing Confidence out at -18 vs. -14 expected and -15 in Dec.
Upcoming Calendar Highlights (all times GMT)
- UK Dec. Mortgage Approvals (0930)
- Euro Zone Jan. Economic/Industrial/Consumer Confidence (1000)
- US Jan. ADP Employment Change (1315)
- US Q4 Preliminary GDP estimate (1330)
- US FOMC Rate Decision/Monetary Policy Statement (1915)
- New Zealand RBNZ Official Cash Rate (2000)
- Japan Jan. Markit/JMMA Manufacturing PMI (2315)
- Japan Dec. Industrial Production (2350)
- Australia Dec. HIA New Home Sales (0000)
- UK Jan. GfK Consumer Confidence (0001)