- FOMC commentary challenges view of ‘More Twist in June’…..
Treasuries initially sold off and the dollar drew support from the FOMC post meeting statement. These moves were subsequently reversed after Mr Bernanke made clear in the post-meeting press conference that ‘We remain prepared to do more’. Equities were unfazed throughout the whole FOMC process though the VIX held its pre-Fed falls and the USD ended NY trade slightly softer versus both the EUR and JPY. Our US economists’ interpretation is that one particular tweak to the statement suggests they are not leaning toward further accommodation when Twist expires in June unless economic and financial conditions deteriorate significantly further. Previously the March statement said, “The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels…consistent with its dual mandate.” The April statement indicated that “the Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels…consistent with its dual mandate.” This suggests to them that if the US economy continues to muddle along at a pace the FOMC considers to be around trend, they will simply continue the current policy stance rather than decide that more stimulus is needed.
- … in turn implying risk to our call for renewed USD weakness come Q3
On the view that the Fed allows the current Operation Twist to expire in June without extension or some alterative additional stimulus – either because current domestic economic conditions are not seen to warrant more action or economic risks from the financial stress linked in particular to the Eurozone have not risen, this has some quite significant implications for our forecast for how the USD evolves in H2 2011. Our current forecasts for AUDUSD recapturing 2011 highs and EURUSD moving above 1.35 are predicated on additional easing and for now we retain the view that this will more likely than not occur (albeit now later than we had previously supposed). If, however, ‘the current ‘Twist’ programme rolls off without immediate replenishment, the subsequent live laboratory experiment regarding the ‘stock versus flow’ debate as to how unconventional policy impacts bond yields, will be key to how the USD behaves heading into Q3. The risk of the dollar ’smile’ reasserting – via higher bond yields that spook risk markets and support the dollar – becomes a distinct possibility. In the meantime, the Fed path remains highly data dependent and today’s initial claims data will be of interest. Any sharp deviation from the 386k prior week figure should be market moving. In Europe, latest EU sentiment readings and German preliminary CPI data will be of most interest, alongside the debate now fully opened up regarding the need for more growth policies to accompany the current rigours of the Fiscal Stability Pact. Note that ECB President Draghi, now calling for a ‘growth compact’ to accompany the fiscal ‘compact’ of which he was such a strong proponent of, speaks in Frankfurt today.
- RBNZ could hardly have been more dovish; we reiterate our short NZDCAD call
Short of announcing a further rate cut, the RBNZ’s latest post-meeting statement could hardly have been more dovish. Governor Bollard makes clear that if the exchange rate remains where it is without a commensurate pick-up in the terms of trade (rebound in commodity prices), then the central bank ‘would need to reassess the outlook for monetary policy settings’. The RBNZ’s current projection for the course of 90-day rates sees policy being tightened in H2 2012. This is now less likely. The RBNZ’s dovishness contrasts with a repetition late Wednesday of the BoC’s tightening bias. Governor Carney says that withdrawal of stimulus will ‘not be hitting consumers with a two-by-four’, but repeats that it may be necessary to withdraw some stimulus. Notwithstanding the (somewhat perverse) NZD reaction to the RBNZ statement, latest central bank comment reinforces our confidence in the short NZDCAD trade.
BNP Paribas