Post-Fed Rally
The post-FOMC risk rally continued on Thursday with the dollar extending its losses in the European session. Data flow on Thursday was minimal and the markets were largely driven by yesterdays Fed actions. A short-dated Italian auction was well received, while Swedish data disappointed and SEK underperformed. Local Greek press reported that private sector creditors are willing to accept a coupon rate of below 4% on the new Greek bonds involved in the debt swap. Investors added more risk, inspired by the Fed’s pledge to keep rates on hold until late 2014. AUDUSD and NZDUSD saw most of the action, and even EURUSD crept higher. With US yields still depressed after the policy decision, USDJPY saw some more slippage, and the enthusiasm for selling yen we witnessed over the past few days has started to wane. Apart from the rates pledge, the Fed also committed to an explicit inflation target for the first time − core personal consumption expenditure (PCE) is to be steered towards 2%. This potentially opens the door to a further round of QE if inflation slows dramatically, and adds to the policy decision’s dovish undertones. If that wasn’t enough, Fed Chairman Bernanke said the fact that rates may be left on hold until 2014 implies that asset sales will not happen before 2015. Taken together, this clearly sets the scene for almost three more years of ultra-loose US monetary policy. The new communication tools provided a detailed look at opinion across the FOMC. New charts revealed that 11 of the 17 members believe a rate hike is not appropriate before 2014 – and several would be content to wait until 2015 or even 2016. Overnight EURUSD traded in a range of 1.3044- .3175 and USDJPY 77.41-76.96, while major equity markets were up at the time of writing.
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