It’s tempting to use the September 13 FOMC meeting as a model for what is going on at the moment across markets and for the USD. But that depends on the Fed’s actions and other issues as well.
FOMC: What to expect
It’s all about the FOMC meeting today and what the Fed announces and the guidance it offers for the future. At issue is the replacement of the current Operation Twist, which is on the order of USD 45 billion per month. Other side issues will be the nonsense about specific economic data targets (yes, it could be meaningful for how the market we will need to react to data releases going forward, but this idea that the economy is going to go up or down based on a reading of the Fed’s reaction to economic data releases is poppycock – it’s based on the dismalist theory that rational expectations will keep everybody happy as a fly in a horse pasture. In reality, it’s just the same old financial market confidence game with a twist).
The Sep 13 FOMC meeting vs. today
The September 13 FOMC meeting saw the USD putting in a local low and risk appetite putting in a local high with a day or so as the much anticipated QE3 became a reality. But everything has a context. Back then, while some might say that the rate of FOMC balance sheet expansion announced at that meeting was somewhat more modest than expected at the time, the fact that it was open-ended somewhat dovish compensation for that.
As well, the FOMC obviously knew in September that its Operation Twist extension would be running out here at the end of the year and that it would have another chance to do something at the last couple of meetings this year if it wanted to either roll or replace that programme and would also have a couple more months of data watching to gain a further impression of the economy and any political progress toward addressing fiscal issues.
With the fiscal issues very much up in the air and with the economy still showing strains (particularly on the capital investment side of the equation even if the employment picture (somewhat misleadingly) appears to be improving), the Fed is ready to continue to offer massive support and monetize a good portion of the Federal budget deficit with new bond buying to help prevent any rise in yields or the idea that the government needs to tighten its belt for fear of such a rise in yields.
So, almost regardless of the outcome, it is tempting to see the setup heading into today’s meeting as similar to the September scenario as we have seen a tremendous run-up in risk and sell-off in the USD coming into today. Back then, AUD/USD topped out around 1.0600 and promptly plunged to below 1.0200. The EUR/USD reaction was similar – from above 1.3100 to about 1.2800. Even the levels are about the same this time, but history doesn’t always repeat, so let’s wait and see here.
Here I offer a few scenarios:
- The Fed underdelivers. That would be anything less than the USD 45B/month. The odds have to be fairly low for this, as the very last thing the Fed wants to do is disappoint the market. Also, when has the Fed last underdelivered on the easing side? Still, one supposes a slightly more likely scenario is one in which the Fed might offer up some smaller figure of bond buying per month and thinks that other compensatory language it puts in the statement suggests it will be there if more easing is needed soon – still this would be an immediate disappointment for risk and would be far more likely to boost the USD.
- The Fed delivers 45 billion/month and not much else besides the usual noise. We might see a knee jerk small move higher in risk and weaker in the USD followed by some fairly heavy profit taking as many have obviously put on the “QE4” trade. Then the question becomes one of whether we see any follow through lower or a move back higher (see more on the levels below). I’m not looking for any durable move lower in the USD beyond early January if the market does decide to celebrate QE4 with a further meltup in risk and selling of the greenback.
- The Fed delivers over USD 45 billion/month and makes an effort to underline potential for more easing of un-named type down the road. The reaction would like be the same as the above scenario, but the knee jerk reaction would likely be far larger (an immediate and more significant blow-out higher in risk and sell-off in the USD) as risk-bearish holdouts would likely be overwhelmed. But any market confidence engendered by today’s QE4 is misplaced beyond the nearest term and any move to even more complacency from already ludicrous levels just takes us another day closer to the inevitable train wreck that Fed policy has us rushing towards.
Remember that today’s FOMC meeting is one of the “big ones” with the statement release followed by all of the Fed economic and Fed funds rate projections followed by Bernanke’s press conference. We also have to consider the fiscal cliff issue and the seasonality (run into the end of the year) as two other factors in play for the moment.
Again, the key will be in the charts in the coming few days. Closes above 1.3170 in EUR/USD and above 1.0600 in AUD/USD suggest risk of a further melt-up if equities also remain on a charge higher (note the DAX’s highest daily close post-Lehman yesterday.
Then we’ll have to look at the change of calendar years and/or the outcome of the fiscal cliff situation as the next possible pivot point for markets. If 1.2800 is taken out again in EUR/USD and a sharp reversal sets in for AUD/USD back well below 1.0500 or 1.0400, then we may have our pivot point and a confirmation that mean reversion remains the name of the game.
Stay careful out there.
Economic Data Highlights
- Australia Dec. Westpac Consumer Confidence out at 100.0 vs. 104.3 in Nov.
- Japan Oct. Machine Orders out at +2.6% MoM and +1.2% YoY vs. +3.0%/-5.0% expected, respectively and vs. -7.8% YoY in Sep.
- Japan Nov. Domestic CGPI out at 0.0% MoM and -0.9% YoY as expected and vs. -1.0% YoY in Oct.
- UK Nov. Jobless Claims Change (0930)
- UK Oct. Average Weekly Earnings (0930)
- Switzerland Dec. Credit Suisse ZEW Survey (1000)
- Eurozone Oct. Industrial Production (1000)
- US Weekly DoE Crude Oil and Product Inventories (1530)
- US FOMC Rate Decision (1730)
- US FOMC to Release Projections for Economy and Fed Funds Rate (1900)
- US Fed Chairman Bernanke holds press conference (1915)
- New Zealand Nov. Business NZ PMI (2130)
- New Zealand Dec. ANZ Consumer Confidence (0000)