USDJPY Spurred by Fed
FX markets were generally confined to tight ranges in the European session, though the initial read-through from yesterday’s FOMC was for a grind higher in USDJPY. We believe this is one of the key crosses which should benefit from the Fed’s policy stance, with front-end yields offering the dollar more support against a Japanese ministry of finance who will be happy to see their currency depreciating. In the Eurozone, a multi-tranche Spanish auction was well received, the yields were inevitably higher but as we have seen repeatedly this year, the treasury managed to issue above their initial target (EUR2.2bn vs EUR2bn). Periphery fixed income spreads to Germany tightened throughout the morning following the auction, though eurusd was largely unchanged. German manufacturing PMI was soft at 44.7 vs 45.2, while services were 50.3 vs 51.5 cons, 51.8 last. The newswires were generally quiet in terms of political developments, though an official from the leftist party announced that the coalition parties have agreed to seek two-year extension to 2016 in order to reach the bailout fiscal targets. While we note there may be room for negotiation on this from the Eurogroup, we have heard several comments from government officials across northern Europe rejecting this idea already. UK retail sales were strong at +0.9% m/m though UK economics notes that the numbers show the effects of weather, a dash of anticipated flag waving, and perhaps that inflation has eased. We would not get too excited about a single month, given complexities of holidays and the Olympics and that interpreting the high-frequency data is always difficult. Last night, the Fed announced that 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”
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