Week in FX Americas – Will the Fed Deliver?

• Market hanging on two words from the Fed
• Has the NFP miss reduced the Fed's urgency?
• US 10's in their longest losing streak in 12-months

The mere thought that the U.S. Federal Reserve is about to change its rhetoric has been enough to scare the markets of late. Will it come in next Wednesday's Federal Open Market Committee (FOMC) statement? This very question has been torturing all asset classes: bonds, equities, and forex. Expect investors to be focusing on just a couple of words regarding the current low-rate environment: "considerable time." If the Fed stops saying it, the market will take it as a "definite indication that something has changed with the Fed's intentions." This will result in bringing forward individuals’ timing of a Fed rate hike. The sweet spot on that curve is currently the second quarter of 2015.

Presently, last week's nonfarm payroll miss (+142k versus +226k) has many in the market pulling back on the Fed's rate normalization timeline. The lower payroll print would suggest that Fed Chair Janet Yellen could lead with "lower for longer." If the number came in on target, or better, then the market would expect pressure on the Fed to lean toward an explicit change to its forward guidance. The miss may have reduced the Fed's urgency to do something of note.

U.S. Treasurys Lack a Bid

Investors can expect the Fed to taper a minimum of $10B off of its third round of quantitative easing, or QE3, next Wednesday, and to again indicate that the program will end in October. Tapering $15B now could send the wrong message; perhaps it will split the difference and go $12.5B over the remaining two meetings.

So far in the U.S. Treasury market, it has been more of the same, with investors liquidating product further out the curve especially in the 10-year bucket. There is definitely a lack of a bid as we close out the week with 10's at +2.585%, up +4bps as prices decline for a seventh consecutive day. That’s the longest losing streak in more than a year fueled by speculation that Yellen may delete “considerable time” from the Fed's statement next week.

What to Expect Next Week

Investors should expect the current uptick in intraday volatility to remain intact supported by geopolitical events, a few central bank meetings, and the Scottish referendum.

The Reserve Bank of Australia will kick-start the week with its Monetary Policy Meeting minutes being released on Monday. A less dovish Fed has been persecuting the carry trades despite a supporting Aussie jobs number. Investors will also attempt to decipher interest rate clues from a speech Bank of Japan Governor Haruhiko Kuroda will make. Currently, they are looking for any sign that Prime Minister Shinzo Abe is pushing for further monetary stimulus.

Scottish referendum fever continues to grip market price action, and though the odds for the country to vote to leave the U.K. has lessened, sterling's fate rests on next Thursday's Scottish independence vote. Along with the vote, expect U.K. retail sales to also occupy the Bank of England's Governor Mark Carney.

A fear of the Fed taking a more hawkish stance at its two-day meeting that ends next Wednesday is keeping both European and U.S. bond yields elevated. U.S. policymakers are expected to shed some light on plans to raise interest rates. The market will be focusing intently on the FOMC press conference after the federal-funds rate decision.

On Thursday, the Swiss National Bank (SNB) will set its Libor (London Interbank Offered Rate) though no changes are expected. However, Swiss authorities could be put to the test if the EUR's downfall escalates and encroaches on the two-year-old EUR/CHF floor at €1.2000. There is no reason to assume the appetite for SNB intervention is diminished at this point. In fact, the pressure for action has intensified.