EUR USD (1.4290) The Fed publicised the minutes from the April 26- 27 FOMC meeting yesterday. The Committee discussed tightening policy by first halting the reinvestment of principal on maturing paper. The second step would be to begin hiking interest rates and, at some point, the Fed would gradually sell its mortgage holdings. However, the key issue of the exit programme is that the Fed shall begin tightening ‘at the appropriate time’. If history is any indicator, the ‘time’ may take a while to arrive. By the end of 2009 central banks were already talking about their respective exit strategies from the extraordinarily easy monetary policy. In the meanwhile the Fed launched QE2. The Fed insists that it will only embark on a subsequent quantitative easing if the economic situation turns significantly worse, and the Committee remains confident in the prospect of economic recovery. Bear in mind that the minutes are by now almost a month old, and many signs of a faltering economy have cropped up since then. Market participants already perceive a slowing economy, and a more recent poll of international fund managers revealed only a 10-percent majority of them believe that the global economy will recover over the next twelve months. The February survey showed that a net 58 percent of those investors were still positive.
Our work shows the euro still risks additional losses until it can cross the 1.4440 stability hurdle.
Market Bias Index
The major currencies are manifesting very little bias presently. We think the largest perceived overvaluation is in the EUR/CHF, and the pound is roundly considered to be undervalued.
Deutsche Bank
Fixed Income Research – Global