The Dollar Groans
The dollar struggled overnight as market participants digested yesterday’s FOMC decision. We see scope for stabilization at these levels however, given the dollar has already sold-off quite sharply since the August payrolls report. The Fed announced another round of asset purchases, targeted exclusively at the agency MBS market. The fed funds rate guidance was also extended to mid-2015 and Operation Twist will continue as before. Although MBS purchases will be conducted at the moderate pace of $40 bn per month, the program is open-ended and so has the potential to become very large. The intention is to persist until the outlook for the labour market “improves”. Consequently, the dollar’s sensitivity to employment-related data releases is likely to increase significantly in future. Fed members revised their growth and inflation outlook upward in 2013, after factoring in the effects of this latest stimulus. Forecasts for unemployment rate, however, remained hardly changed at 7.6% to 7.9%. USDJPY maintained its composure despite the Fed’s decision, with the pair supported both by the threat of intervention, and the Fed’s decision to avoid buying US Treasury securities. Attention will soon turn to how the Bank of Japan may respond. Overt pressure is already being applied for further monetary easing. Economy Minister Furukawa said that Japanese monetary policy must take into account the impact of overseas developments such as FOMC decisions. In this environment, it is reasonable to assume that a further extension to the BoJ’s APP is likely at Wednesday’s policy decision. Ahead today, markets will pay attention to the Eurogroup meeting in Cyprus, although we do not expect any major developments to flow from it.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank