USD Advances, Slowly
The dollar made some broad-based but tentative advances overnight in the wake of the Fed’s decision to continue its maturity extension program until the end of 2012. As before, it will purchase Treasury securities in the 6-30y segment of the curve and pay for these by selling Treasurys with a residual maturity of “approximately” 3 years or less. The Twist will continue at the same pace as before. Crucially, as before, there will be no balance sheet expansion. There was no change to policy guidance either so “exceptionally low levels of fed funds rate” are still likely to be warranted “at least through late 2014”. However, FOMC officials slightly pushed back their personal estimates for when rate hikes will begin. This was the first FOMC policy meeting for two new FOMC governors – Stein and Powell. They have yet to speak publicly in their new capacities, but for now we know that neither chose to dissent against mainstream Fed opinion. Only Richmond Fed President Lacker cast his vote to oppose the continuation of Twist operations. The Fed also revised its real GDP and employment forecasts downward for the next three years though the inflation expectations, especially for 2013 and 2014, remained fairly unchanged. The statement noted that the “growth in employment slowed in recent months” and “household spending is rising at a slower pace than earlier”. Notwithstanding the ephemeral risk sell-off following the announcement, the market response was fairly muted as investors remain fixated on Europe where the headlines lately have been relatively positive. New Democracy’s Samaras was sworn in as the new Prime Minister of Greece after successfully forming a coalition with PASOK and the Democratic Left parties. He recruited Rapanos, chairman of Greece’s biggest commercial bank as the finance minister, who will now represent Greece at the Eurozone’s Finance Minister meeting on Thursday. Sentiment was also supported by news reports suggesting that EU’s Van Rompuy will present a report at the EU summit next week which discusses jointly issued short-term bills, a debt redemption fund, and common banking supervision. Considering that these are still proposals which are far away from getting the consent of the creditor nations like Germany, we remain skeptical on the euro’s recent recovery.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank