FX Update: FOMC meeting focus on Fed balance sheet outlook FX Update: FOMC meeting focus on Fed balance sheet outlook FX Update: FOMC meeting focus on Fed balance sheet outlook

FX Update: FOMC meeting focus on Fed balance sheet outlook

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  Market anticipation around the FOMC meeting later today is fairly muted as the policy outlook for the immediate future is rather flat. Still, how Powell treats questions around how the Fed sees the growth of its balance sheet from here could move markets, which are only where they are due to the Fed bringing back the policy punchbowl this year.


Yesterday saw a fresh round of churning on stories linked to the prospects of a US-China trade deal, first on stories quoting anonymous sources that indicated the US is prepared to delay the December 15 tariffs as long as phase one negotiations are ongoing and then a later statement from White House officials denying any plans to take the December 15 tariff hikes off the table. Clearly, we’re all subject to the whims of President Trump, who might do something like waiting until the weekend to announce that a phase one trade deal is done and that tariffs will be reduced and the December 15 tariffs delayed for a year depending on how Chinese purchases of US goods proceeds and the fate of “phase two” negotiations. The implicit hope being that this punts the trade issue beyond the 2020 election and keeps the issue from impacting the outlook for equities, which close out the year on a high note. This is just a random guess and we could also see the entire process breaking down if the Chinese side is not satisfied with the terms of the deal or Trump is likewise not satisfied.

Speaking of closing out the year, the very influential and credible Zoltan Pozsar, an analyst with Credit Suisse and instrumental in helping the Fed to navigate the financial crisis back in 2008-09, was out with a long piece suggesting that the Fed is still far from getting ahead of USD liquidity problems into year end and it will have to do “real QE” (purchasing longer term treasuries in addition to T-bills) to avoid a market meltdown and melt-up in yields into year end. This is a bold call – especially given the compressed time frame. Cue this evening’s FOMC meeting and Powell press conference. The Pozsar piece got such extensive coverage that we could even see questions directly linked to this piece in the Q&A. In any case, Powell’s observations on its balance sheet plans are likely to carry more weight than dot plot adjustments or anything in the statement.

The quarterly Norway Regions Survey out yesterday saw a sharp deterioration in the measure of the 6-month forward outlook, which dropped to an 11 quarter low of 0.96 vs. 1.23 expected and 1.35 in the prior quarter. This is one of the sharpest drops in several years.

Chart: EURSEK
We have an interesting test of the Riksbank’s apparent determination to hike rates to 0.00% as Sweden’s parlous activity surveys and weak growth in Europe and globally are at odds with tightening. Today’s CPI brought SEK a bit of a further boost and EURSEK is working down through the 10.50 area, possibly opening up for 10.25-20 if the backdrop is friendly (risk appetite stable, positive US-China trade outcome etc..)

Source: Saxo Group

The G-10 rundown

USD – the US dollar inert ahead of the FOMC as we await Fed spin on its policy outlook – more on the balance sheet observations and from the Powell Q&A (questions linked to Pozsar observations could prove particularly interesting) rather than any shifts in the dot plot outlook.

EUR – EURUSD trading right  at the mid-line of the last two months of price action and trying to find a pulse over the FOMC and ECB meetings today and tomorrow after recent record lows in shorter- and longer term options implied volatility.

JPY – the recent bearish reversal in USDJPY not getting any support from higher bond yields and strong equity markets – but still  impressed that we are trading below 109.00 despite the strong US jobs report Friday. Ten-year JGB’s trading above 0% are part of that story.

GBP – sterling sharply weaker on one of the more influential polls suggesting a tightening of the race and the chief question here is the immediate size of the relief rally in GBP if the consensus outcome of a . I would suggest around 1.3500 in GBPUSD and perhaps 0.8250 in EURGBP, but this could prove too cautious – as indicated in the piece I put out on the election yesterday, my main idea is that there are many uncertainties for the  longer run once we get past the election and formal Brexit hurdles.

CHF – curious strength in the franc given action elsewhere, but not worth comment unless  EURCHF is pressing below 1.0850, where SNB likely leaning against further strength.

AUD – a weak NAB survey yesterday and a fresh drop in Australia’s consumer confidence in December after the big bounce in November are not good news here, though iron ore prices (Australia’s largest exports) are buoyant.

CAD – the weakness from the Friday November jobs report fading slowly and awaiting any catalyst on the USD outlook from the FOMC tonight.

NZD – the long slide in AUDNZD finally checked slightly overnight on no apparent catalyst. The NZDUSD rally has faltered around the key 61.8% retracement of the prior sell-off.

SEK - solidly bid as we discuss above as this morning’s Swedish CPI boosts expectations that the Riksbank may carry out the rate hike next week rather than waiting until February. Regardless if markets stay away from any fresh meltdown into year-end on USD liquidity issues or trade deal concerns, the next major objective lower for EURSEK is 10.20-25 if a break below 10.50 is sustained.

NOK – if NOK manages to overcome this latest setback versus the euro after this weak Regions Survey with a solid sell-off back below 10.10 in EURNOK we have a decent signal that the market has front-run the end-of-year seasonality issue, otherwise, we don’t really know where NOK stands until the first weeks of the New Year.

Today’s Economic Calendar Highlights (all times GMT)

  • 1330 – US Nov. CPI
  • 1530 – EIA Crude/product stocks report
  • 1900 – US FOMC Meeting
  • 1930 – US Fed Chair Powell Press Conference
  • 2120 – Brazil Selic Rate Announcement
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.