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Daily FX Market Commentary

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There were very few changes in the FOMC statement

Thu, Nov 5 2009, 08:03 GMT
by Flemming J. Nielsen

Danske Bank A/S

Key news

• There were very few changes in the FOMC statement. Importantly, Fed still expects interest rates to be exceptionally low for an extended period.
• Initial response to the FOMC statement were higher long bond yields and weaker USD. However, a late sell-off in the stock market on concerns about financial earnings has since reversed these market movements.
• Bank of Japan’s minutes confirm termination of quantitative easing does not signal imminent rate increase.

Markets Overnight

The Fed left its leading interest rate unchanged and there were very few changes to the statement compared to the previous meeting. Importantly, Fed affirmed that it “..expects to keep rates exceptionally low for an extended period”. Scheduled purchases of Agency bonds were reduced by USD25bn due mainly to limited supply and hence this is not a signal that Fed is scaling down its quantitative easing, see Flash Comment - FOMC: Very little change to the statement.

Bank of Japan’s minutes from its October 13-14 meeting were released overnight. From the discussions it becomes clear that board members wanted to communicate clearly to the market that the termination of its non-conventional easing measures should not be regarded as a precursor to rate rise.

European stock markets are expected to open lower today. The US stock market yesterday reversed most of its earlier gains in very late trade, despite an initially very positive response to the FOMC statement. The late sell-off was led by financial stocks following a vote on a House bill to curb credit card rates. After market close in the US Cisco released better-than-expected earnings and issued a strong guidance for the current quarter. However, this has not been able to turn the negative sentiment in the stock market overnight. Stock futures have declined further and Asian stock markets are lower across the board this morning.

In the US bond market the yield curve initially steepened significantly on the FOMC announcement, with 10Y yields higher and 2Y yields lower. However, bond yields have since edged lower on the back of the negative sentiment on the stock market, and 10Y bond yields in the US are broadly unchanged since market close in Europe yesterday. The size of the US Treasury’s refunding operations for Q4 (including its auctions next week) announced yesterday was in line with market expectations

In the FX markets USD continues to behave like a funding currency. It initially weakened on the FOMC announcement, but has since reversed its losses on the back of the negative sentiment on the stock market. GBP has weakened slightly ahead of today’s BOE announcement. Scandinavian currencies are trading mainly on the general risk sentiment in the market and both SEK and NOK have weakened against EUR since market close in Europe yesterday.

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Published on  Thu, Nov 5 2009, 08:10 GMT