Dollar Bid Into FOMC
The dollar gained across the board in the European session as investors geared up for the monthly FOMC meeting. Despite a strong German IFO print, the euro dropped one big figure, a further indication that the recent risk rally is losing some steam. Equity markets were trading in the red across most of Europe while EURUSD traded in a range of 1.3052-1.2959. The January MPC minutes showed a 9-0 vote split for no change in rates and the asset purchase program. The minutes acknowledge that the most serious near-term risks have moderated, but the overall tone remains dovish. USDJPY continued its recent ascent, breaking through 78. The move got underway during the US session yesterday, likely in anticipation of a significantly less-dovish Fed. Data confirming that Japan’s trade balance slipped into deficit territory for 2011 for the first time since 1980 also probably supported the pair at the margin. However, we note that the current account still remains in surplus due to coupon-related inflows from overseas investments so USDJPY should remain heavy in the Asia timezone despite the end of the trade surplus. The true test for USDJPY will be today’s FOMC meeting where the Fed will unveil a new set of rate forecasts for the first time. There are three events to watch: the policy statement will first be released, followed later by the new projections for how for policy rate will evolve over the coming years. Fed Chairman Bernanke’s post-meeting press conference will then start 15 minutes later. We expect journalists to quiz him extensively on the possibility of further QE, and we doubt he will rule it out entirely, especially given uncertainty over how the Eurozone sovereign debt crisis will evolve. Stronger core Australian CPI gave AUD a substantial boost overnight while EURUSD traded in a range of 1.3014-1.3047 and USDJPY 77.62-76.98. BoE minutes and UK Q4 GDP data are also due.
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UBS Investment Bank