Today is all about the final stages of the FOMC wait – meanwhile, the JPY has made major gains today across the board – a red herring or is something brewing here?
SNB: keeps peg – EURCHF about to revisit that peg?
The Swiss National Bank today said it would keep the EUR/CHF peg at 1.20 and continue to buy unlimited amounts of foreign currency to defend that peg. Of course, “unlimited” is not truly unlimited as there is an imaginary line out there somewhere on the horizon at which the peg becomes too costly, but for now, the Euro short squeeze has become so powerful that EUR/CHF has even torn loose from its moorings and rallied. Let’s see where we are once the Euro selling resumes after this squeeze is done – perhaps as soon as post FOMC if the Fed fails to deliver the grand QE3, perhaps a couple of weeks. The SNB and Swiss government will reach a crisis moment the next time around if the push to buy CHF proves any larger than the last one, which saw almost CHF 200 billion in accumulation. That’s a lot of francs for a population of 8 million to be buying over just a few months. There will be an overhead supply of EURCHF for years to come considering the mountain of reserves the SNB has already piled up. The SNB also issued lower growth estimates for 2012 and slightly lowered inflation expectations.
Looking ahead
For everyone living under a rock, there is an FOMC meeting later today with the announcement at 16:30 GMT, FOMC economic and Fed Funds Rate projections at 18:00 GMT and Bernanke press conference at 18:15 GMT.
I’ve issued my playbook for today’s FOMC yesterday, in terms of EURUSD and EURAUD and EURCAD in particular. I suspect that the future holds some variation on the following:
- “Hawkish” Scenario: Fed doesn’t do much more besides extend horizon (or maybe removes the horizon and instead describes explicit triggers for tighter monetary policy?) even if it makes it clear that it will act strongly soon, particularly if fiscal cliff risks loom large. Reaction: Bedlam – make way for the might greenback and possibly also the JPY and look out below for commodity currencies
- Dovish scenario: full blown QE3, with most dovish version being open-ended amounts and horizon for exceptionally low rates either extended or removed. Reaction: further leg up in risk of short duration – whether that is rest of day or one more day or one more week, it’s hard to say, but so much is already priced in at this point.
One thing that doesn’t sit particularly well with the current market environment is the strong JPY, which took back all of yesterday’s lost ground against the Euro today and hit new highs since February versus the USD. Whether this is a run on stops ahead of the FOMC is tough to say as there is clearly a lot of positioning clearing going on elsewhere, but it’s worth noting – GBPJPY
Chart: GBPJPY
Certainly not a chart that is in focus – but look at the degree of reversal here in GBPJPY and right back below the 200-day moving average as I am writing this – is a stronger JPY brewing here?
GBP/JPY" title="GBP/JPY" width="455" height="285">
Economic Data Highlights
- New Zealand RBNZ leaves rate unchanged at 2.50% as expected
- New Zealand Aug. Business NZ PMI out at 47.2 vs. 49.4 in Jul.
- Switzerland Producer and Import Prices out at +0.5% MoM and -0.1% YoY vs. -0.1%/-0.7% expected, respectively and vs. -1.8% YoY in Jul.
- Sweden Aug. Unemployment Rate out at 7.8% vs. 7.5% expected and 7.5% in Jul.
- Switzerland SNB leaves 3-month Libor Target Rate unchanged at 0.0% as expected
- Sweden Jul. Average House Prices out at 2.098M vs. 2.091M in Jun.
- Sweden Aug. CPI out at +0.1% MoM and +0.7% YoY vs. +0.3%/+0.9% expected, respectively and vs. +0.7% YoY in Jul.
- Canada Jul. New Housing Price Index out at +0.1% MoM and +2.3% YoY as expected and vs. +2.3% YoY in Jun.
- US Aug. Producer Price Index out at +1.7% MoM and +2.0% YoY vs. +1.2%/+1.6% expected, respectively, and vs. +0.5% YoY in Jul.
- US Aug. PPI ex Food and Energy out at +0.2% MoM and +2.5% YoY vs. +0.2%/+2.6% expected, respectively and vs. +2.5% YoY in Jul.
- US Weekly Initial Jobless Claims out at 382k vs. 370k expected and 367k last week
- US Weekly Continuing Claims out at 3283k vs. 3318k expected and 3332k last week
- US Weekly Bloomberg Consumer Comfort Index out at -42.2 vs. -46.5 last week
- US FOMC Rate Decision (1630)
- US FOMC Releases Economic and Fed Funds Rate Projections (1800)
- US Fed Chairman Bernanke Press Conference (1815)
- New Zealand Sep. ANZ Consumer Confidence (0100)