Markets Consolidate, Eyes On FOMC Later This Week

Asia equities open mildly higher today, digesting recent losses while forex markets are stuck in range with the yen trading in a soft tone. Traders will probably be cautious ahead of Wednesday's FOMC announcement and press conference. There are expectations that Fed chairman Bernanke will explain the issue of tapering the asset purchases, and the differences in tapering from policy tightening in particular. He's also expected to calm markets by stating that the Fed could withdraw stimulus before the economy could gather sustainable momentum.

Bond guru Bill Gross anticipates the Fed would end QE later this year. His forecast was not driven by expectation of sustainable recovery in the U.S. economy, but the Treasury will lack bonds to issue due to lower than expected deficits. Gross appears less optimistic on the effectiveness of QE measures as economy stimulants. He stated that "central banks seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment... That theory requires challenge if only because it doesn't seem to be working very well".

The SNB rate decision is another focus this week. President Jordan talked about the topics of raising the EUR/CHF floor and negative rates on commercial banks excess deposits last month. However, markets are not expecting any change in policies this time, as the SNB's hands are tied up by the housing market boom. It's generally expected that the SNB will keep the three month Libor at zero and the EUR/CHF floor at 1.2.

New Zealand consumer sentiment improved today to 116.6 in Q2. U.K. rightmove house prices rose 1.2% mom in June. The Japan tertiary industry index was flat mom for April. The eurozone trade balance, Canadian international securities transactions and the U.S. NAHB housing market index will be released later today.

Latest CFTC data showed significant improvement in euro and Sterling positions on June 11, compared to the prior week. Meanwhile, the Aussie's position continued to deteriorate. Euro net shorts dropped for the second consecutive week to -7.5k from -51.6k. That's significant improvement from -84.6k two weeks ago, which was 2013 low, closing to this year's high of 38.0k net long. Yen net shorts dropped to -72.9k from -82.7k. Sterling net shorts dropped sharply to -53.7k from -77.4k. Aussie position deteriorated for the 11th week with net shorts rising to -63.3k from -58.6k. The Canadian dollar position was relatively unchanged at -35.9k net shorts.