Fed Dovish
15/10/09 08:11
FED Dovish
The US dollar was hit by surprisingly dovish FOMC minutes as several policymakers spoke in favour of increasing the MBS purchase limit beyond the current ceiling of $1.25 trn. Only a few weeks ago, there was some speculation that the program would be cut short prematurely, even before that limit was reached. Mixed views about inflation were also expressed, but the majority of the FOMC felt it would be subdued ahead. The minutes clearly indicate the FOMC is a long way from tightening and balance sheet reduction does not appear to be a policy priority either.
Strong Q3 earnings reports from the US financial sector and better than expected retail sales also kept the dollar under pressure. September US retail sales fell 1.5% m/m - a better outcome than the 2.1% m/m drop expected by consensus. Retail sales ex-autos rose 0.5% m/m in September, also beating the consensus expectation of a 0.2% m/m rise.
The US dollar was hit by surprisingly dovish FOMC minutes as several policymakers spoke in favour of increasing the MBS purchase limit beyond the current ceiling of $1.25 trn. Only a few weeks ago, there was some speculation that the program would be cut short prematurely, even before that limit was reached. Mixed views about inflation were also expressed, but the majority of the FOMC felt it would be subdued ahead. The minutes clearly indicate the FOMC is a long way from tightening and balance sheet reduction does not appear to be a policy priority either.
Strong Q3 earnings reports from the US financial sector and better than expected retail sales also kept the dollar under pressure. September US retail sales fell 1.5% m/m - a better outcome than the 2.1% m/m drop expected by consensus. Retail sales ex-autos rose 0.5% m/m in September, also beating the consensus expectation of a 0.2% m/m rise.
Nobel laureate economist Stiglitz warned against the US intervening in the currency market to slow the dollar's slide, saying "There are fundamental reasons why the dollar is weak and trying to keep it up from where the market level is would be very costly." If he's anything like other "Nobel's", economists and the like, take word with caution. Nobel winners have been known to wipe out accounts of their investors.
Ahead today, we get more top-tier international banks reporting earnings, with the results so far boding well for today's announcements. If further positive surprises materialize, more gains for commodity currencies at the expensive of the USD are likely. We also get September CPI and initial jobless claims.
We forecast EURUSD at 1.45 in 1m, and our 3m target is 1.40, given that we expect a temporary decline in risk appetite over the coming months.
EUR: Bini Smaghi hints at ECB-Fed divergence
ECB Executive Board Member Bini Smaghi expressed caution on the economic recovery saying that it was difficult to assess and that "the current situation is surrounded by high uncertainty about the position of the cycle, the speed of the recovery in front of us requires caution." He also raised the prospect of policy rate divergence between the Eurozone and US, saying that the ECB cannot coordinate everything with the Fed, and that different rates of recovery in different economies would require different policy approaches.
It was reported that Bank of France Governor Noyer will be named by President Sarkozy to a second six-year term when his mandate expires at the end of the month.
EURUSD is likely to stay driven by investor risk appetite, and moves in the short term will heavily depend on Q3 corporate earnings.
NZD: Strong CPI
CPI for Q3 came in well ahead of expectations overnight, with consumer prices rising 1.7% y/y against expectations of a more modest increase of 1.1% y/y.
The strong print raises the chances of the RBNZ shifting to a neutral policy stance at its policy meeting on Oct 28.
JPY: Fujii still watching JPY
Finance Minister Fujii said that a stable currency is important both domestically and internationally, adding that he never said a strong yen is good for the economy. He warned however that countries must not engage in competitive devaluations. He also said that the Japanese economy should not rely so heavily on exports and that the government is therefore aiming to shift the economy more towards domestic demand-led growth..
This comes after Japan's deputy finance minister yesterday said that current yen strength is due to USD weakness, that rapid FX swings are undesirable, and that rises in the yen are not a sufficient excuse for intervention.
A Reuters poll of 225 large Japanese companies found that 40% would prefer the BoJ to continue to buy CP as part of the emergency corporate funding programme that was introduced earlier this year. There had been increased speculation recently that the BoJ might withdraw the facility due to poor levels of participation. Although no changes were introduced at yesterday's policy decision, BoJ Governor Shirakawa said that the matter would be looked at in a future policy meeting. The measures are due to expire naturally in December, having already been extended several times..
Industrial production grew by 1.6% m/m in August versus the +1.8% flash estimate.
We look for USDJPY at 85 in 1m.
AUD: RBA Gov Stevens still hawkish
RBA Governor Stevens maintained his hawkish tone in a speech entitled, "The Conduct of Monetary Policy in Crisis and Recovery." He said that last week's rate hike was a 'step' in the direction of returning to a normal rate setting, given that expected downside risks have not materialised. He added that close attention will be paid to the spread between borrowing costs in the economy and the Cash Rate when making future rate decisions.
Stevens also said that Australia's banks will 'pretty soon' be able to cope without state guarantees. This follows yesterday's RBNZ announcement that special liquidity measures to support NZ banks would be discontinued.
RBA data today showed the central bank net sold A$830mn on the spot FX market in September, up from net sales of A$576mn in August.
Ref: Bloomberg, UBS