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About GAIN: News & Events |
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RESEARCH NOTE: April 29 FOMC Rate Decision
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: The Fed will release its press statement on Wednesday at 1815GMT/1415ET. The target rate will remain the 0.00-0.25% range and the Fed will likely note that it will continue to engage in quantitative easing via the purchases of Treasury securities. Two important things to look for in the statement will be 1) whether the Fed decides that more aggressive Treasury purchases are necessary as yields have ground significantly higher since the first QE announcement (witness the 10-year now flirting with the 3.0% level once again) and 2) whether the word "stabilization" will be used when describing the economy. Indeed, the theme from the recent Beige Book -- a resource which the Fed uses extensively in its meeting -- was that while economic growth remains extremely subdued there were some signs of "stabilization" emerging. The more forward-looking consumer confidence reports have also seen a significant rebound. Namely, the Conference Board expectations component soared to 49.5 in April from 30.2 in March -- and this tends to lead consumer spending quite well. We would think that a more upbeat assessment on the US economy, coupled with a more aggressive plan for Treasury purchases would see "risk trades" become better bid and hurt the US dollar. This in turn would be constructive for EUR, the yen crosses, and the commodity currencies.
Trading Strategy: Risky FX assets (long JPY-crosses, short-USD) have made a relatively sizeable rebound since the swine flu-induced spike in risk aversion at the start of this week, so we would focus on those risky FX pairs that have so far lagged in the current risk recovery. If the Fed pronounces more optimistically on the economic outlook and embraces a more forceful Treasury buying plan, we would look to buy AUD/JPY and CAD/JPY as well as spot gold. A more optimistic sounding Fed may spark a further rebound in sentiment that could diminish fears over the length of the global slowdown, which in turn could spur another rally in commodities, benefitting those currencies to a greater extent. In addition to the impact of a potential commodity rebound, larger Treasury buying plans are likely to lead to a further surge in gold, as the unknowns of quantitative easing undermine the value of the USD.
If the Fed's assessment is less optimistic or more even-handed, noting some stabilization but also further downside risks, essentially a status quo assessment, we would stand aside as month-end positioning likely makes for a more confused reaction.
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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Overview