-Fed delivers QE, further USD weakness is in scope
The USD continues has continued to sell-off on Friday as the market reacts to the Fed’s delivery of open-ended QE and commitment to balance sheet expansion until the labour market improves substantially. The prices action supports our view that investor’s FX positioning ahead of the FOMC was as complacent on the prospect for QE. Our positioning analysis shows that the market has switched from a large net long USD position in Q2 to a very small short. There is plenty of scope for the USD to continue to weaken. In line with our USD weakness call, we remain long NZDUSD, targeting 0.8470. Given the Fed’s policy, Japanese policy makers are getting nervous about a renewed bout of JPY strength and speculation of intervention has picked up. Press reports suggested BOJ has been checking rates following the FOMC announcement yesterday. Meanwhile, FInMin Azumi has continued with verbally jawboning the currency. The yen has reacted by selling-off, triggering the take profit target on our long EURJPY recommendation for a 3.2% gain.
– Two-day Ecofin/Eurogroup meeting starts today
In our view, USD weakness is set to overtake EUR strength as the principle catalyst of the markets, although we remain long EURCHF targeting 1.2500. Today the Ecofin/Eurogroup meeting is set to kick off today. Discussions will be centred on the banking union and a general framework for the conditions that would be attached if a country asks for a programme. Such a framework could imply that we could get one step closer to receiving closure on Spain, as Spain has been on the fence about asking for aid until they receive more clarity from the politicians.
– More details on the Fed’s bazooka
The Fed made an open-ended commitment to monetary accommodation, highlighting that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens”. Essentially, the Fed set a high bar for removing monetary stimulus. The Fed decided to continue with Operation Twist through year end and will also purchase mortgage-backed securities at a pace of USD 40bn per month. The Fed indicated that if the labour market outlook does not improve substantially, then the Committee will continue buying MBS, undertake additional asset purchases and employ other policy tools as appropriate. In addition, longer-term securities holdings are set to increase by USD 85bn each month. Based on our economists’ forecast, the Fed is likely announce further purchases of securities at roughly the same pace, despite running out of short-term assets to sell under Operation Twist. We think that they will continue to buy USD 85bn per month throughout 2013. The Fed balance sheet will therefore expand substantially – our base case is for an expansion of USD 1.165trn (larger than QE1 or QE2). We therefore view that Bernanke has delivered on expectations for further QE and recommend investors to continue to sell the USD. For further details see our FX Weekly, Yes, the Fed Delivers – Sell the USD, 13 Sep 2012.
– US unlikely to shift our bearish USD view; Swedish data supports long NOKSEK positions
A barrage of US data (CPI, Industrial Production, retail sales, Michigan Sentiment) is on the calendar for today. August CPI is expected to see another modest gain in core prices, and industrial production is set to come in flat for the month of August, while the underlying trend of manufacturing production should reflect the weakness in the recent manufacturing surveys. The data are unlikely to change the market’s views on Fed policy, which means that USD weakness is set to continue. Meanwhile, on the data front during the European session, Swedish GDP disappointed by being revised markedly lower in Q2 to 0.7% q/q from 1.4%. This follows from soft Swedish CPI and unemployment data this week. We continue to recommend buying NOKSEK at current levels targeting 1.1700. See our FX weekly for further details.
BNP Paribas