|
|
 |
 |
|
RESEARCH NOTE: Sept 16th FOMC Preview
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: We expect the Fed to keep rates steady at 2.00% despite the additional market turmoil since last week. The Fed has been addressing financial market instability through the use of expanded liquidity operations and adjustments to collateral requirements, which the Fed supplemented on Sunday in the wake of the bankruptcy filing of the 4th largest US investment bank. In contrast, for the broader US economy, the Fed has used interest rates cuts to minimize the fallout from the housing bubble and ongoing disruptions. The macro outlook for the US economy has stabilized in large part in recent months, though at relatively weak levels. We do not think a macro-economic case can be made to justify interest rate cuts at this point and that financial market disruptions alone are also not sufficient to justify cutting rates. Even if they were, there is little reason to expect that a 25 bp cut, or even 50 bps, would actually filter through and provide meaningful support to the financial sector. Conversely, a rate cut by the Fed now could be interpreted by markets as a panic reaction to recent events, suggesting the Fed fears even worse developments ahead.
Trading Strategy: (N.B.--Due to the increased market volatility of recent days, the price levels we cite below may or may not come into play.) Going with our base case scenario that the Fed stays on hold, we expect the USD reaction to be initially positive, but then for a negative stock market reaction to take hold, shifting the focus back to selling in the JPY-crosses. Our primary strategy is to sell USD/JPY on any post-announcement bounce; we view the 106.70-107.50 area as a zone to establish shorts; stop over 108.10. Our secondary strategy will be to sell EUR/JPY on strength into the 150.70-151.30 area; stop over 151.80. Given our expected dovish tone to the FOMC statement, we also think it makes sense to consider buying EUR/USD between 1.4090/1.4140 should those levels be seen; stop below 1.4050.
Looking beyond the immediate aftermath of the FOMC decision, we still see the USD in an uptrend, driven by broader economic weakness outside the US and sharp commodity price declines. We do not believe the current financial market upheaval alters that macro-economic shift, and we would like to use any outsized USD weakness against EUR and GBP in particular, to re-establish USD longs/EUR & GBP shorts. In EUR/USD, we think the 1.4450/1.4520 area offers a good short opportunity; stop over 1.4600. In GBP/USD, our sell zone is between 1.8100/70; stop over 1.8250.
FOMC Statement Analysis: The statement itself is likely to reflect some significant changes both on the growth and inflation front. The Fed is likely to recognize the slowing in US economic activity specifically in the employment space, where the unemployment rate popped to 6.1% from 5.7% and initial jobless claims continue to remain lofty near 440k. The phrase that "financial markets remain under considerable stress" will undoubtedly remain in the release as well, especially given the events of this past weekend. Inflation rhetoric should be more dovish this time around. Last time the Fed said that "inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities". With the sharp pullback in oil - down more than $20 since the last Fed meeting, and below $100 in earnest - the statement will be toned down to reflect stronger expectations that inflation will come off the boil sooner rather than later. In terms of gauging what is ahead for rates, the inclusion of the statement that "the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth" should be a hint that the Fed remains on hold for the foreseeable future -- in line with our expectations.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
|
|
 |
|
