USD gains as Fed hints at steeper normalization path

Market Brief

The Fed did not disappoint at its September meeting. While renewing its zero rate pledge, the FOMC hinted at a steeper rate normalization path. The US 10-year government yields advanced top 2.6270%, the DXY index hit 84.782, highest since July 2013. USD gained across the board, the FX markets are consolidating post-Yellen levels.

To summarize the FOMC verdict, the monthly asset purchases have been reduced by additional 10 billion dollars and the Fed will continue buying 10 billion dollar treasury and 5 billion dollar MBS on monthly basis. The APP will end in October. In her speech, the FOMC Chair Yellen repeated that the monetary policy will remain highly accommodative for a “considerable time” after the end of the QE, that the slow wage growth reflects the slack in the labor market. Yellen added that there is no mechanical interpretation of “considerable time”.

Today’s big events are the SNB and Norges Bank policy decisions, the ECB balance sheet expansion with the first round of TLTROs and the Scotland’s independence vote. The FX markets remain highly volatile with busy eco-political calendar.

EUR/USD sold-off to 1.2835, GBP/USD rebounded from 1.6250. The markets are in wait-and-see mode before the Scottish referendum results. We expect consolidation throughout the day and stand ready for two-sided volatilities as the first results flow in.

The AUD, NZD and JPY recorded the heaviest post-Fed losses. USD/JPY rallied to 108.87 alongside with Nikkei stocks (+1.13%). The option bets have been left far behind, with option bids trailing up from 107.50 through the end of the week. Deeper overbought conditions (RSI at 86.5%, 30-day upper BB at 108.53) require some downside correction. Japanese exporter offers and profit taking are presumed pre-109.00/110.00. The Japanese leading pension fund GPIF and other pension funds sold 1.1 trillion yen worth long-term JGBs and purchased 393 billion yen worth stocks in 2Q.

AUD/USD tumbled down to 0.8959 (lowest since Mar 12th) in Sydney. Trend and momentum indicators remain comfortably negative with next support zone eyed at 0.8891/19 (Mar 12th low / Fib 23.6% on Nov’13 – Jan’14 drop). A critical support stands at 0.8660 (4-year low hit on Jan’14).

NZD/USD traded down to 0.8078 post-Fed announcements and re-tested 0.8080 in NZ trading. The double dip support should trigger some rebound, yet the bias remains solidly negative. The key support stand at 0.8052, level at which the 2014 gains will be entirely paired.

The economic calendar consists of Swiss August Trade Balance, Exports & Imports m/m, Swedish 2Q (Final) GDP q/q & y/y, UK August Retail Sales m/m & y/y, Italian July Current Account Balance, Canadian July International Securities Transactions, US September 13th Initial Jobless Claims & September 6th Continuing Claims, US August Housing Starts & Building Permits m/m, Philadelphia Fed’s September Business Outlook, US 2014 Preliminary Current Employment and US 2Q Household Change in Net Worth.