At the time of writing, the market awaited anxiously the outcome of a two-day FOMC meeting in which the Federal Reserve was expected to announce a new bout of monetary easing, more commonly referred to as QE2.
The US central bank was expected to announce a large-scale asset purchases programme on Wednesday to spur economic recovery. Markets were generally priced for the Fed to commit to buying at least $500 billion in Treasury debt over the coming months.
The size of the programme is key, as a bigger than expected asset buying or money printing programme will weigh on the dollar and boost commodity prices, while smaller buying would hit investor risk appetite.
The EUR/USD is trading sideways since the end of last week, as it consolidated in a range between 1.3700 and 1.4080. Despite positive economic data from the US, mainly US Q3 GDP in line with consensus expectations at two per cent Q/Q annualised and the manufacturing ISM which jumped to 56.9 in October from 54.4 in September, any USD rallies quickly faltered above 1.3800.
The single currency was no different, as strong manufacturing PMI data failed to drive the euro, as investors were clearly waiting for further policy clarity before putting on any new risk-seeking positions.
Eurozone final PMI read 54.6, which was revised up from 54.1, providing another strong reading. At a national level, most major economies surprised to the upside with Germany providing a strong reading of 56.6 and giving further indications that it remains in a strong position relative to its European peers.
For the third week in a row, no bond purchases settled last week under the ECB’s sovereign bond buying programme. However, sovereign yields for peripheral issuers are still widening, suggesting the ECB may need to reactivate the programme in the near future. Greece, Ireland and Portugal debt widened by circa 25 bps, and Spain and Italy underperformed by about six to eight bps versus Germany in the five year area.
We are surprised by how much the Forex market seems to have ignored the peripheral issues compared with earlier in the year. However, the scenario for the euro could change once the market focus moves away from the US and the Fed.
Meanwhile, former Fed chairman Paul Volcker expressed some scepticism regarding any likely success from a second round of easing. He said that he did not expect “overpowering results” from any policy easing the central bank adopts and warned that further monetary easing could create inflation risk and fresh challenges to the US central bank in the long term.
On Tuesday morning, the Reserve Bank of Australia surprised the market when it raised the cash rate by 25 bp to 4.75 per cent. The Overnight Index Swap (OIS) market had attached a 35 per cent probability to an RBA move at the November meeting.
The move by the RBA is seen as a pre-emptive strike against inflation, which sent the Aussie above parity to 1.0023 against the greenback. It was the second time the currency has scaled parity since it was floated in 1983.
The RBA’s intervention increased the interest rate differential between Australia, where rates are rising, and the United States, where the Federal Reserve is widely expected to ease policy further to help stimulate the economy.
The USD/JPY was extremely volatile at the start of the week, with the pair first reaching 15-year lows after US Treasury yields fell across the board on Friday in anticipation of the FOMC. The greenback then suddenly spiked early in Asia, up to 81.56, more than one yen. However it quickly fell back to within sight of its 1995 record low of 79.75, as rumours emerged the jump had been caused by a miss-hit or technical glitch.
Japan’s Economics Minister Banri Kaieda said the government should intervene if FX market movements are abrupt. Mr Kaieda went on to say that he is closely watching the outcome of the FOMC meeting, but that the BoJ will make its own decision on monetary policy.
Finance Minister Yoshihiko Noda said that FX moves in recent days were one-sided and that he stands ready to take decisive action if needed.
Upcoming FX Key events:
Today: EZ ECB Interest Rate Decision, UK BoE Interest Rate Decision and Asset Purchases Target.
Tomorrow: US Non-Farm Payrolls, US Unemployment Rate and Canadian Employment.
FX Technical Key points:
EUR/USD is neutral.
USD/JPY is bearish, target 79.50, key reversal point 90.00.
GBP/USD is neutral.
USD/CHF is bearish, open target, key reversal point 1.0200.
AUD/USD is bullish, open target, key reversal point 0.8900.
NZD/USD is bullish, target 0.78, key reversal point 0.7000.
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Mr Muscat is senior trader at RTFX Ltd.