– Fed and US data offer little help to the USD
The FOMC reaffirmed its commitment to the USD 85bn per month asset purchase program and made only minor changes to the language of its statement. The Fed said growth in economic activity has paused largely due to temporary factors and noted that the financial market strains had “eased somewhat”. Kansas City Fed President Esther George, who had previously expressed reservations about QE3, dissented noting the risk of future economic and financial imbalances resulting from current policy. The dissent is thus not a surprise and effectively replaces the vote of the previous dissenter Jeffrey Lacker. The bottom line is that there are no signs of a shift away from QE3; moreover, recent data suggest that the economy remains well short of the substantial and sustained improvement that the Fed is looking for. The Fed statement also made no reference to the negative drag from fiscal policy, which will be increasingly relevant going forward, in our view. US Q4 GDP growth was the big surprise with a decline of 0.1% q/q saar. While large contraction in government spending weighed on the quarterly outcome, the subdued 1.5% growth pace for 2012 remains well below trend. The January ADP employment report was stronger than expected at 192k, but was toned down by the downward revision to the December data. Our US economists maintain the January NFP forecast for 150k gain in jobs and a rise in the unemployment rate to 7.9%. FX market reaction to the FOMC has been mild, but we note that the DXY index is threatening trendline support at 79.2. From a technical perspective, a clear break of this level would open further USD downside.
– Bullish EUR drivers intact
EURUSD broke above the 1.3500 and is now within reach of 1.3600. There appears to be little to deter the current EUR rally. Lower participation in the 3m LTRO has added to the move higher in EUR rates. The chart below shows that the EUR 1Y1Y IRS has backed up sharply and close to levels before the LTRO was announced in December 2011. Meanwhile, Eurozone survey data continue to improve and recent ECB speakers show no signs of talking down either the recent rise in rates or the gains in the EUR. Today’s German data calendar is cluttered one and we see more positive than consensus outcomes in both December retail sales (+0.2% m/m) and unemployment (a gain of 5k). Eurozone bond markets have been more mixed lately. EURCHF has come under some pressure, but appears to be a consolidation rather than a reversal in trend; we maintain a EURCHF long recommendation with a 1.28 target. We also stay with our long EURSEK position (8.80 target) but raised our stop from 8.440 to 8.5650 (entry) to protect the position from unexpected strength in Swedish data.
– Better times for NZD and GBP
NZDUSD is higher after a relatively optimistic RBNZ statement which noted improvements in the financial market conditions and global outlook and said economic growth will strengthen over the coming year. The governor sees inflation heading slowly back up to 2%. A bounce back in NZ jobs data next week would add to the recent stronger numbers (trade, building permits) and we see NZDUSD gaining above 0.84. GBPUSD has continued to show signs of finding a base, outperforming after the FOMC announcement. We continue to maintain that markets have been excessively pessimistic on UK growth as a number of leading indicators suggest momentum should improve. The better money and credit figures today suggest that the BoE’s Funding for Lending scheme (FLS) is beginning to show early signs of having an impact, particularly in the housing sector. In Japan, official jawboning still prevails with JPY pretty much hostage to their rhetorics. BOJ deputy governor Yamaguchi said that further easing is possible and BOJ may increase asset purchase if required. Of note too, a BOJ governor candidate Iwata said that BOJ appointee should pledge to reach 2% inflation target by 2% and that BOJ law should be changed to increase government oversight, albeit foreign bond buying are not required to beat deflation.
BNP Paribas