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Research Note: March 18 FOMC Meeting Outcome
Brian Dolan, Chief Currency Strategist
Summary Outlook: On Wednesday, March 18 at 1415EDT, the FOMC is expected to release its interest rate decision and a statement reviewing the current economic outlook, but the key will be whether they announce any new initiatives to spur bank lending to consumers. With the Fed's target rate already at 0.0-0.25%, there is no room to cut rates further. On the current state of the economy, the Fed statement is likely to be very similar to the January statement (bleak), but they could note some potential indications of stabilization, possibly in retail sales or housing, but even that would be a stretch in light of worsening jobs markets and industrial production.
More likely, in the economic outlook section, the Fed will retain its expectations that economic conditions will improve in the second half of the year and that a recovery will ensue in 2010. Policymakers are under tremendous pressure to break the cycle of pessimism and the Fed is not immune to this, as was apparent in the unprecedented '60 Minutes' interview with the Fed Chair. I look for the Fed to utilize the most compellingly optimistic language on the outlook to get this message across. They may even drop the notation of 'significant downside risks' to that outlook, though it is likely premature given the scope of this downturn. Again, it's about an optimistic tone and instilling confidence.
The primary market focus looks to be on what, if any, new measures the Fed might announce in the final section addressing steps taken to support credit and financial markets. Expectations that the Fed will announce plans to purchase longer-term Treasury securities (to drive down consumer lending rates) seem ripe for disappointment, given recent Fed officials' comments on the subject. Instead, they are likely to re-affirm their commitment to expanding the Fed's balance sheet and to highlight the implementation of the TALF (Term Asset-backed securities Lending Facility) in coming weeks. If they fail to announce new measures--this is a market in need of constant reassurance and action--we look for disappointment to register as the initial reaction in stock markets. However, the ultimate reaction will stem from the tone (bleak, reassuring, or upbeat?) expressed in the FOMC's view on the prospects for recovery later this year.
Trading Strategy: Overall, I look for the dominant relationship between the USD and risk aversion to drive Forex moves post-FOMC. If stocks rise, the USD should weaken; if stocks fall, the USD should strengthen. JPY-crosses, which have shown a positive correlation to stocks' movements lately, may lag on risky asset gains, as institutional interest to sell USD/JPY between 99-100 may inhibit gains in USD/JPY. (However, if USD/JPY does surmount 99.30/50, a much stronger move higher may be unfolding for USD/JPY and the JPY-crosses.)
Tuesday's close in US stock markets was very bullish, with all three key US indexes closing above their Ichimoku Kijun lines, opening the way higher toward their respective clouds. Not coincidentally, the USD Index has closed below its Kijun line, exposing the buck to further weakness ahead. I would expect markets to build on today's bullishness and for stocks to be higher/USD lower in overseas trading ahead of the FOMC. If so, market gains would then be subject to the FOMC statement and whether it confirms or disappoints, but I would look for markets to seize on any optimism expressed by the Fed and extend the day's gains.
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.
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