Market Eyes Fed
The Fed takes center stage on Wednesday as markets gear up for some subtle hints of the Fed’s policy prospects in the short- to medium-term. Our economists note that the Fed is unlikely going to alter its view that “economic conditions…are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” However, there may be some revisions to its normalization forecasts, forward from its current Q4 2012 view. This will be indicated in the Fed forecasts ahead of Chairman Bernanke’s press conference. Neither an extension to QE nor ‘Operation Twist’ is to be expected. The dollar appears to be treading water heading to the FOMC decision, though we doubt this is due to any underlying issue on the part of the Fed itself. Even if stimulus extension were an option, we view EURUSD as not the most suitable vehicle to express this view. The Euro itself has managed to navigate a few more short-term challenges this week than previously anticipated, and the consequent capitulation in some tactical shorts may have triggered the wider move. Rather, it is USDJPY which could have the most to lose from a Fed which is still stubbornly dovish, especially as most of the potential easing from the Bank of Japan later this week has already been priced in. Given the scale of policy developments adopted in Japan over the past few years, it is hard to see any marginal impact on the JPY liquidity provision (but not outright intervention) could produce. With US yields still slumping despite relative data outperformance, material change in the Fed’s view is the final piece of the puzzle needed to trigger the actual flows out of Japan by asset managers. Our flow data suggest this is happening on a selective basis, but could easily be unwound should Bernanke’s more dovish views win over not just the FOMC but the wider Federal Reserve System community. The FOMC aside, UK GDP is out on Wednesday, while the RBNZ will also hold its policy meeting (out late US time).
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank