FOMC disappoints, Fed becoming more divided?
USDJPY looking on slightly firmer ground above Y79.50.
EUR back on the skids as growth concerns and absence of risk appetite jump to the fore.
Uncertainty over Greece (with one Pasok MP publicly stating he will vote against the Budget next week) and a lack of clarity over the Fed’s longer-term policy direction are keeping investors sidelined, leading to directionless and illiquid FX markets. Weak Eurozone ‘flash’ PMIs and a weaker-still China manufacturing PMI have now added an extra layer of concern regarding the US soft patch as a symptom of a more pronounced global slowdown.
The FOMC disappointed those hopeful for a stronger commitment to the current policy stance once QE2 ends next week: There was no application of the ‘extended period’ language to the Fed’s balance sheet size; and no commitment to extend the average duration of bond holdings as maturing assets are reinvested. In the ensuing press conference, Chairman Bernanke made clear the Fed had made no decisions here. After a suggestion in the WSJ last week that they would, this then portrayed a picture of a less unified Fed, with the dovish ‘troika’ of Bernanke, Dudley and Yellen not necessarily holding sway. More will be revealed when the minutes of Wednesday’s meeting are published in three weeks’ time, but with the Fed chairman also making clear that current conditions in terms of inflation in particular are much different from last year when QE2 was agreed upon, it is evident that the bar to QE3 is exceptionally high. This should offer the dollar a modicum of support in coming weeks, though the very limited back-up in US Treasury yields in the wake of the FOMC meeting statement and Bernanke press conference means this is far from guaranteed. USDJPY at least has found a stronger footing above Y80, and amid reports of deep and varied local buy orders just beneath Y80, we are more confident that the Y79.50 key support level will hold near term.
EURUSD has the ‘going down forever’ look to it as New York enters the fray. The news flow since the Fed is clearly unsupportive of risk; Eurozone ‘flash’ composite PMI consistent with Q2 growth down to no more than 0.3-0.4% (less than half the Q1 pace) and while a July ECB tightening is very much on the cards and we challenge the dramatic scaling back of future tightening expectations, concerns about the US slowdown prefacing a more pronounced global slowdown are palpable. The fall in the HSBC version of the China PMI, to 50.1 from 51.6 is another poor omen here (though note the official PMI has tracked above this version in recent months).
Watch also for headlines out of the EU Heads of State meetings today and tomorrow suggesting that core Europe and the IMF are insisting on a cross-party consensus as a condition for approval of the second bailout package – possibly in an attempt to pressure the New Democrats to back the bill. This may be wishful thinking, and with fears that the successful confidence vote on Tuesday night does not necessarily imply all PASOK MPs will vote for the budget, the adage ‘many a slip ‘twixt cup and lip’ now seems apt. US data wise, initial claims and new home sales are due; former seen holding near last week’s 414k level while home sales are expected to fall by 4% after last month’s +7.3%. BNPP economists expect a fall closer to 10%.
BNP Paribas
Corporate & Investment Banking