Dovish Fed Drives Risk
The dovish FOMC decision continued to drive markets in Asia. 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. There was more strong data out of Germany yesterday with the Ifo improving once again, and even the January BoE minutes acknowledged that the most serious near-term risks to the Eurozone have moderated. As expected the RBNZ left its cash rate on hold, and the policy language implied Governor Bollard is in no hurry to move in either direction. The lack of economic data out of Europe today means attention will likely focus on Italy’s auction of short-dated paper. But Monday’s BTP auction, now only two trading days away, is the greater risk. Overnight, EURUSD traded in a range of 1.3044-1.3126 and USDJPY 77.56-76.96.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank