USD Pares FOMC Losses as JPY Sinks

The US Dollar was in recovery mode through the European session as EUR/USD gained to US$ 1.3535, USD/JPY gained to ¥98.46, AUD/USD fell to US$ 0.9483, and NZD/USD improved to US$ 0.8411. USD collapsed by its largest daily amount in fourteen months after the FOMC wrongfooted the markets and voted to keep monetary policy unchanged, deciding to not begin its long-anticipated QE3 taper. The markets priced in a US$ 5-15 billion monthly reduction from the current monthly US$ 85 billion asset purchases and the decision to keep policy intact pushed USD higher on the premise that interest rates will remain ultra-accommodative for an extended period of time. In June, Chairman Bernanke suggested QE3 will be unwound by mid-2014, a schedule that looks ambitious now. Attention now focuses on the October, December, and January FOMC meetings. Bernanke reported “conditions in the job market are still far from what all of us would like to see” and added “the (FOMC) has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth. In its statement, the FOMC’s forward guidance indicated its target interest rate will remain near zero “at least as long as” unemployment exceeds 6.5%, provided inflation is not above 2.5%.” Bernanke later added the first rate hike may not come until the jobless rate is “considerably below” 6.5%. The Fed also changed its forecasts for 2013 economic growth to a projection of 2% to 2.3%, down from June’s 2.3% to 2.6% range. The Obama administration reportedly is asking Senate Democrats to qualify support for Fed Vice Chair Yellen’s likely appointment to replace Bernanke. Today’s data include weekly initial jobless claims, Q2 current account, August existing home sales, August leading indicators, and September Philadelphia Fed index.

The Japanese yen was weaker across major peers through the European session as EUR/JPY rallied to ¥133.19, GBP/JPY gained to ¥158.78, AUD/JPY appreciated to ¥93.48, and CAD/JPY reached ¥96.30. BoJ Policy Board member Kiuchi today said he “sees risks to Japan’s economy tiled somewhat toward the downside…uncertainty remains over whether advanced economies, mainly the United States, can take up the slack from slowing growth in emerging nations and offer sufficient support to the global economy." Kiuchi also suggested two years will not be enough for BoJ to overcome deflation. Japanese data saw the July all-industry activity index improve +0.5% m/m, up from the revised prior -0.7% level, while the July coincidence and leading indices improved to 107.7 and 107.9, respectively.

The Swiss franc was mixed against other currencies through the European session as USD/CHF moved higher to CHF 0.9136, EUR/CHF appreciated to CHF 1.2344, CHF/JPY bettered to ¥107.93, and AUD/CHF came off to CHF 0.8643. The Swiss government today upgraded its 2014 GDP growth forecast to 2.3% from June’s 2.1% projection, and now sees 2013 GDP growth of 1.8%, up from the prior rate of 1.4%. Also, SECO’s 2013 inflation forecast remains unchanged at +0.1% and now sees 2014 CPI around +0.3%, up from +0.2% in the June forecast. SNB’s interest rate decision is due today and no change in policy is anticipated with the central bank likely maintaining its EUR/CHF floor at 1.2 for an extended period of time. Swiss data saw the August trade balance narrow to CHF 1.85 billion from the revised prior print of CHF 2.4 billion.

The British pound found mixed strength rival currencies through the European session as EUR/GBP climbed to £0.8393, GBP/CHF weakened to CHF 1.4694, GBP/AUD bettered to A$ 1.7004, and GBP/CAD slumped to C$ 1.6494. GBP rallied significantly yesterday on the FOMC’s decision to not taper QE3 but also after the BoE’s MPC meeting minutes for September revealed policymakers who suggested there was scope to expand monetary accommodation in August unanimously concluded this month to cast easing considerations aside. Also, BoE’s economic forecast for 2013 GDP growth was upgraded to 0.7% from the prior 0.5% projection. Spreads between 10-year UK gilts to US Treasury Notes are now at their highest level in two years around 32bps, an indication the market clearly anticipates official UK rates will need to move higher earlier than the BoE’s forward guidance. August retail sales and September CBI numbers are expected today.

Gold and Silver added to yesterday’s gains through the European session as Gold rallied to US$ 1368.33 and was supported at $1358.67 while Silver appreciated to US$ 23.195 and was supported at US$ 22.823. Gold’s advances yesterday were fueled by the FOMC’s decision to not begin its QE3 taper yet, and Gold notched its largest single-day rally since 1 June 2012 – just a few hours after moving below the US$ 1300 figure. The notion that liquidity will be in the financial markets to chase the prices of riskier assets such as Metals higher contributed to gains. Holdings of Gold in exchange-traded products continue remain near yearly lows.

Crude Oil was better through the European session as Brent futures climbed to US$ 110.77 and was supported at $110.41 while WTI futures gained to US$ 107.82 and were supported at $107.19. Syrian President Assad reported his country will “fully commit” to the chemical weapons disarmament agreement laid out by Russia and ratified by the US. WTI futures were also helped higher by a report that inventories of crude in the US declined for an eleventh consecutive week, down 4.37 million barrels to 355.6 million. Traders continue to monitor developments in Libya where that country is trying to increase daily output to about 700,000 barrels.