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About GAIN: News & Events |
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RESEARCH NOTE: January 28 FOMC Rate Decision
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: On Wednesday January 28 at 1415ET/1915GMT, the FOMC is expected to announce a steady interest rate decision, having effectively adopted a near-zero interest rate policy at its last meeting in December. The FOMC statement will be scrutinized for the Fed's current assessment of the economy, which is unlikely to contain any cause for near-term optimism, leaving markets with little in the way of fresh news. However, if the Fed announces that it is moving forward with a plan to buy longer-dated US Treasury securities we would expect a significant reaction in bonds. This sort of measure would likely see risk appetites increase in the near-term as yields would probably fall hard resulting in an improvement in the outlook for US housing - via potentially lower mortgage rates. In FX this would translate into higher EUR and JPY crosses across the board, which would likely be mirrored in stock market gains.
Trading Strategy: If the Fed statement does not include any concrete steps on buying US Treasuries outright, we think the FOMC decision may be a non-event, presenting no discernible trading opportunities in advance. But if they announce plans to buy longer-dated US Treasury securities, bond markets are expected to react sharply, buying Treasuries and sending yields lower. The optimism engendered in such a move would likely see stocks rally on potentially lower consumer borrowing rates and renewed optimism that housing may stabilize sooner. In currencies, we would expect to see the USD lose safe-haven demand and for the JPY-crosses, in particular, to see higher. Because of the positive correlation between USD/JPY and US Treasury yields, USD/JPY may see initial weakness as Treasury yields drop. But we would then expect a sharper recovery as JPY-cross buying limits USD/JPY downside. Our preference would be to sell USD and buy EUR, GBP, or AUD if the Fed announces plans to buy longer-dated US Treasuries.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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