• Home ::
• Technical ::
• Forex Strategy ::
• Forex Trading Strategies

• Send
• Print
• Add To
• Rss

Forex Trading Strategies

d5a6ba1c-af0d-4ac5-8620-fa8ed50167f3

12

0

FOMC: Market suggests little expectation now of Fed hawkishness

Thu, Nov 5 2009, 05:48 GMT
by John Hardy

Saxo Bank

ISM Non-manufacturing data also on tap for today. Yen struggling as bonds sell off.

MAJOR HEADLINES – PREVIOUS SESSION

• US Weekly ABC Consumer Confidence rose to -49 vs. -50 expected and -51 last week

• US Oct. Domestic Vehicle Sales out at 7.94M vs. 7.3M expected and 6.8M in Sep.

• Australia Oct. AiG Performance of Services Index out at 54.8 vs. 49.3 in Sep.

• UK Oct. Nationwide Consumer Confidence out at 72 vs. 73 expected and 72 in Sep.

• UK BRC Shop Price Index unchanged YoY vs. -0.1% in Sep. 

• Australia Sep. Retail Sales fell -0.2% MoM and -0.4% ex Inflation QoQ vs. +0.5%/-0.5% expected, respectively 

• Australia Sep. Building Approvals rose 2.7% MoM vs. 2.3% expected 

• UK Services PMI out at 56.9 vs. 55.5 expected and 55.3 in Sep. 

• EuroZone Sep. PPI out at -7.7% YoY as expected 

• US Oct. Challenger Job Cuts fell -50.7% YoY vs. -30.2% in Sep. 

• US Oct. ADP Employment Change dropped -203k vs. -198k expected and -227k in Sep. 

  
  

THEMES TO WATCH – UPCOMING SESSION 

(All times GMT)

• US Oct. ISM Non-manufacturing (1500) 

• US Weekly DOE Crude Oil and Product Inventories (1530) 

• US FOMC Rate Decision (1915) 

• New Zealand Q3 Unemployment Rate (2145) 

• New Zealand RBNZ's Bollard to Speak (2345) 

• Japan BoJ Monetary Policy Meeting Minutes (2350) 

• Australia Sep. Trade Balance (0030) 

Data overnight from Australia was mixed, but those with half-full glasses decided to buy AUD again with the focus on the strong surge in the Services survey and yesterday's commodities rally and wrote off the weak September retail sales number as ancient history. The early indications of the US employment data for October in today's ADP show a slightly less bad fall in payrolls, though it is still depressing to see payrolls continuing to shrink. Still, the Challenger layoff survey showed layoff down more than 50% from last years levels. The biggest movers since yesterday have been the JPY crosses, with the Yen struggling mightily on a return of the US 10-year benchmark above 3.50% on the day of the FOMC meeting. JPY crosses will remain nervous on interest rate volatility.

ISM Non-manufacturing 

Important day today, to say the least, with the ISM non-manufacturing survey on tap, the survey that accounts for the largest portion of the US economy. The September number was barely above 50 (50.9) and consensus is looking for a small additional improvement to the headline number. As we mentioned with the release of the ISM manufacturing survey earlier this week, there may be considerable focus on the employment subindex of today's non-manufacturing survey after the manufacturing employment subindex leaped to 53.1 from 46.2. This combined with today's ADP reading will set the expectations for Friday's non-farm payrolls number.

FOMC in focus 

The FOMC is the main event later in the day, of course, with every analyst trotting out their view on how the Fed plans to fine tune its monetary policy statement this time around. "Fine tune" is the appropriate wording, as the consensus is that the Fed is probably mostly happy to watch how things are going for a while without rocking the boat and may only tinker lightly with the language this time around to increase flexibility to the hawkish side, without trying to sound too hawkish. A Bloomberg news headline sums up the situation very well: "Bernanke Tries to Acknowledge Rebound Without Foreshadowing Rate Increase". This would seem to be akin to having your cake and eating it too... In any case, analysts' focus is mostly on the part of the monetary policy statement that states:

"The Committee.... continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

The degree to which the above sentence is altered will likely form the view on the degree of the Fed's hawkishness. In addition, we can probably expect the beginning paragraph of the statement to contain slightly more upbeat language on the Fed's assessment of the economy.

US Banks too big to exist?

On whether the largest of the bailed out US banks are "too big to exist" (a term we plagiarized yesterday and discovered that a New York Times article actually used this expression in an article back in June), there is also interesting commentary on Bloomberg ("Banking Break-up is Template for Obama's Zombies") about the tough medicine needed to eliminate the possibility of a bank becoming a systemic risk. The argument is that the US might look to the UK to find inspiration in how it is dealing with banks that have required yet another huge round of funding: the government is setting an interesting precedent with its demands that RBS hive off parts of its operations, effectively creating new banks in the process in some instances. Certainly the political pressure is mounting on Obama to look more decisive as 2010 approaches after Republicans captured the governorships of Virginia and New Jersey yesterday in an off-year election.

Looking ahead: FOMC scenarios 

So what is priced into today's FOMC statement? The recent profit-taking in risk and USD upside was likely a symptom of many market players taking chips off the table ahead of today's meeting in the fear that the Fed might begin a more hawkish bent to its language. Bonds have also retreated, though not decisively. But the USD sell-off again and rally in risk since yesterday seem to have neutralized expectations and the market may be leaning a bit more to a fairly toothless statement with few changes. To use EURUSD as our broader market barometer, 1.4850 is the short term key on the close to the upside, while a close back toward yesterday's low or lower is a bearish indicator.

On the dovish side of the equation, the less the Fed alters the statement, the more this is likely to feed a resumption of the rally in risk, which could mean another go at 1.5000 in the days/weeks ahead in EURUSD, though the USD rally of the last two weeks has wreaked some damage to the old trend and we still have technical arguments for the USD to remain at least rangebound for now. The huge rally in commodities yesterday would seem to favor a weaker USD scenario.

If the Fed comes out more hawkish than expected, the outcome for the markets is less clear for all but the Japanese Yen, which will suffer mightily if the bottom falls out of the bond market here. Look at today's chart for signs of an upside down head and shoulders formation developing in USDJPY. Certainly, firm changes to the statement that raise expectations of rate moves sooner rather than later are the "surprise side" for today's meeting and would therefore generate a larger reaction. As for the USD reaction to any hawkishness, a stronger USD reaction will require that the Fed be sufficiently hawkish to also dent risk appetite broadly speaking, as the USD/risk appetite correlation is still very much intact.

Chart: USDJPY 

A potential upside down head and shoulders formation here if the rally continues, which it may if bonds are unable to find support through the end of the week. To the downside, a close below the 21-day moving average (in blue) is important for the downside view. 

Published on  Thu, Nov 5 2009, 06:03 GMT