The Day After the FOMC

November 2 2010 by Spencer McKay in Forex Release |No Comments

The morning after, has us witnessing the sharp return of risk appetite, with high beta currencies gaining the most against the greenback. AUDUSD is now trading safely above parity (closing in on 1.01 resistance), while USDSEK has pushed below the short-term bullish trend line support. Regional Asian indices have rallied hard with the Nikkei climbing 2.17% and Shanghai up 1.85%. And after a very choppy day of trading, gold has rallied back to yesterday’s mid-range price at $1357.00.

Yesterday’s FOMC decision came in as close to consensus as possible, given the varied expectations. The Fed announced that it “intends” to purchase a total of $600bn, or $75bn a month, through the end of Q2 2011, while keeping the door ajar for further easing if necessary. In addition, the Fed would reinvest maturing MBS into treasuries which could lead to roughly $850 – 900bn over the same period. As for the USD outlook, much depends on the incoming US data and shifting expectations for the probability and quantity of additional purchases. With the Republican-controlled House of Representatives actively seeking to stymie President Obama’s fiscal stimulus plan in the US, the Fed might become the tool of choice given its current independence.

We remain bullish on commodities along with EM & commodity currencies given the sluggish US recovery, risk positive environment, the continued usage of the USD as a funding currency – added to the fact that the Fed’s finger is now firmly on the easing trigger.

As for today, the major events, although highly likely to be non-events, will be the BoE and ECB interest rate announcements. Even prior to the FOMC meeting, we had our doubts that the MPC would initiate another round of easing. Data has been slightly skewed to the upside, with PMI services increasing to 53.2, representing the highest level since June, while price pressures continue to be a nagging concern. Overall there has just not been enough evidence in either direction to change members’ views. While the market has been concerned that the Fed’s actions would cause the BoE to follow in time, this sentiment has been steadily eroding, giving GBP support. However markets will probably remain cautious over the UK’s growth prospects, and we feel the follow-though effects of deep spending cuts should slow the sterling ascent.

As for the ECB, we expect no change in policy rates or shift in other unconventional monetary policy measures, making the meeting less than thrilling. Yesterday, Irish-German 10y yield spreads widened to a record 500bp, highlighting the ongoing risks weighing on sovereign debt markets. As the smoke clears from the FOMC meeting, we suspect that traders will refocus their attention on events in the Eurozone. Concerns that Ireland, Portugal and Greece (See FT article today) could spiral out of control, should slow the EURUSD upside for now.

And on a final note, there was considerable hype surrounding the BoJ decision to bump up their two-day meeting decision to just after the FOMC. The move has led to speculation of further easing. However, as with much of the BoJ recent action, we suspect that it was really just for show and will be only used as an opportunity to conclude the plan for the new asset purchase facility.

08:15 CHF CPI 0.0 prior
08:43 EUR ITA Markit Serv PMI
08:48 EUR FRA CDAF Serv PMI
08:53 EUR GER Markit Serv PMI 56.6 P
08:53 EUR Markit Serv PMI 53.2 P
08:58 EUR Markit Comp PM 53.4 P
12:00 GBP BOE Rate Decision 0.5% exp/prior asset p £200bn
12:30 USD Initial jobless claims, thous (4wma) 452 prior
12:30 USD Nonfarm productivity, % q/q saar Q3 0.0 exp, -1.8 prior
12:30 USD Unit labor costs, % q/q saar Q3
12:45 EUR ECB Governing Council Meeting 1.00 exp/prior
13:30 EUR ECB press conference

The Risk Today: EurUsd EURUSD has been gunning to break higher all week, and yesterday’s Fed announcement was just the excuse required to burst through the long held 1.4080 resistance (25 Oct high) and indeed the 1.4158 level above (15 Oct high). For now, 1.4195 (25 Jan high) has been the only thing capable of capping the bears, but should that level be toppled, we are looking at clear skies until 1.4414 (19 Jan high). Amidst all the excitement, the symmetrical triangle pattern we highlighted yesterday is now well underway, with a target on the topside around 1.4415. Given the proximity of this target to the 1.4414 resistance level, we’d prefer to start taking profit in a staggered fashion from 1.4350 levels upwards. Near term support is likely to be provided by the former resistance at 1.4080 (so a dip back there would be an extremely tempting level to add to longs), then next levels on the downside are eyed at 1.3970 (back side of triangle pattern and lower edge of 1-week uptrend), 1.3807 (1 Nov low), 1.3734 (27 Oct low), and 1.3700 (range floor).

GbpUsd Many thanks to the UK PMI data and post-Fed USD sell-off yesterday as we cheerfully witnessed GBPUSD rallying all the way up through 1.6105 resistance (15 Oct high) and on to our bullish flag target 1.6160 –banking nearly 200 pips of profit. With the 2-week uptrend channel still looking strong, the pair is flying on the wings of good bids, and as mentioned in previous reports, now that 1.6105 has been cleared, there are few discernible pockets of supply expected above. The upper edge of the 2-week uptrend is coming in around 1.6235 with the 1.6275 level (26 Jan high) just behind–beyond those levels we’re looking at a return to 1.6460.As a long-tormented Brit myself, I’m pushing for this pair to go all the way back to 2.0000 so we can start planning a shopping trip to New York, come on the pound! Expect 2-week trendline support to precipitate on any dips towards 1.6000-10 today (especially considering its coincidence with the 1.6000 psychological level). Further down, supports are eyed at last Friday’s lows 1.5875, 1.5730 (27 Oct low), 1.5727 (50-day moving average), 1.5650 (20 & 22 Oct high), and 1.5600 (22 Sep low).

UsdJpy Interesting developments in USDJPY yesterday; the first surprise we were not expecting at all was the successful completion of the bullish triangle pattern on the hourly chart (hitting the 81.35 target) –before the Fed fireworks even took place! Kudos to those who were brave and willing enough to play that one, we’re holding our hands up right now that we wanted nothing to do with a 60-70 pip bullish strategy ahead of Bernanke & co’s announcement, but that’s just us. What was more significant in our view, was that straight after the Fed announcement, the ensuing whipsaw of volatility did not even look close to re-threatening the 80.21 lows (31 Oct), which makes us cautious there may be a lot of frustrated bears out there wanting to cut shorts. There is a nascent uptrend channel forming on the hourly chart which should entice buyers around 80.80, so combined with the disappointing price action yesterday we’re no longer as gung-ho about piling in on shorts. Really we’d need a push down through 80.21 and probably a closing break below 79.76 (the 1995 all-time lows) to re-entice us into the short trade again. Above us, a downtrend vibration is eyed at 81.55, then that 82.00-35 zone remains a major hurdle for any rallies (82.00 has been unconquerable since mid October despite a number of attacks, 82.35 is the 12 Oct high). Nevertheless, the signs are definitely beginning to point to a reversal higher for this pair, so keep watching.

UsdChf Wowzers, things moving fast in USDCHF! We left this one yesterday just after it had broken down through its 3-week uptrend channel, and since then it has not only carved out a bearish flag pattern on the hourly chart, but activated that pattern by plunging through 0.9780, and is well on its way towards its target 0.9630. On the downside, we eye pockets of demand at 0.9665 (25 Oct low), 0.9570 (20 Oct low) and 0.9540 (18 Oct low) –but really with Swiss fundamentals continuing to look strong, the bears like us will be wanting to push for a return to the all-time low 0.9464 (seen on 14 Oct). Sellers will be lurking above us on any rallies back towards 0.9740-60, with the back side of the 3-week uptrend channel currently around 0.9865. Say farewell to parity folks, I doubt we’ll be getting close to that one again.

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