Long risk currencies into the Fed
The FOMC meeting this evening concludes with the statement release and summary of economic projections [18:00 GMT, 2pm local] followed by Bernanke’s press conference [18:30 GMT, 2:30pm local]. Our base case expectation remains that the Fed will take a pass on announcing tapering today but will leave the door open for reducing the pace of asset purchases later in the year. Even if they do elect to announce a tapering of purchases, we expect the pace to be a gentle $10bln with reduced emphasis on a mid-2014 end point noted at the June press conference. The Fed may also elect to lower the threshold for its policy rate forward guidance from the current 6.5% to 6.0%, further cushioning the impact of the tapering announcement. We think these fairly dovish scenarios should be good news for risk sensitive commodity bloc and EM currencies, while the USD should hold up reasonably well against the lower-yielding CHF and JPY as long as the statement and/or press conference continue to support expectations for tapering by year-end. We remain long USDCHF and AUDJPY heading into the meeting. In the more extreme case where the Fed leaves its policy statement and message largely unchanged and offers no new insight on tapering, the USD would probably lose ground more broadly, including vs. the low-yielders. At the opposite end of the spectrum, a decision to taper aggressively (i.e., at a $20bn+ pace) would likely see the USD gain more broadly, including vs. high yield and EM currencies.
Read the full report: FX Daily
BNP Paribas