Head of FX Strategy
Summary: The FOMC meeting provided less dovish signalling on the forecasted rate trajectory than expected and barely adjusted the statement or the economic forecasts. But the pivotal stuff was in the press conference, where Powell was very careful in his wording on how the Fed would continue to deal with expansion of its balance sheet, leaving the market a bit hog-tied in reacting to this meeting.
Very little volatility over the FOMC meeting last night as the market struggled to come away with a strong signal on what comes next. On the one hand, the meeting looked hawkish at the margin because the monetary policy statement was almost entirely unchanged, the economic forecasts saw almost nary an adjustment, and the dot plot forecast showed a less dovish shift than the market was looking for. Powell’s general message on the economy was that the Fed sees a generally healthy outlook.
On the other hand, the immediate concern for the Fed and markets is communication around the recent liquidity event that required the Fed’s emergency repo operation. The general message on this issue was save for the press conference and question and answer session and the general takeaway is that the Fed would respond with further liquidity operations as needed, but on an ad hoc basis and with (what is a new acronym for me as of yesterday): TOMO, or temporary open market operations, rather than planning any immediate POMO, or permanent open market operations, like those during the QE era of 2009-14.
The general attempt from Powell was to project confidence that the Fed is on top of the situation and ready to provide liquidity when these situations arise, but didn’t want to signal much beyond that for now. The most revealing snippet may have been in answer to a NY Times reporter, who asked [whether the Fed had overdone it with QT]” to the point that reserves are too scarce to get through sort of these unusual periods, is organic growth in the balance sheet [mentioned earlier by Powell] enough to get back to a point of ample reserves that can get us through those tough times or would you need to see something a little bit above that? And is that a possibility the committee would consider?”
Powell’s answer: “…I think for the foreseeable future, we’re going to be looking at, if needed, doing the sorts of things that we did the last two days, these temporary open market operations [TOMO!]. That’ll be the tool that we use. And the question will be then as we … how much of this really has to do with … the level of reserves? And I think we’ll learn quite a lot in the next six weeks.” We assume the six weeks reference is to the next FOMC meeting in six weeks.
So the bottom line of this FOMC: Powell’s indication on preparedness to address liquidity issues is effectively an admission that Fed control of its balance sheet is slipping away and that the more generous it becomes in providing liquidity, the more it is enabling excessive Trump deficits (NOT mentioned by Powell at the presser, but implicit in what is going on here). Expect all manner of technical adjustments from the Fed from here to. The chief question for FX traders here is whether the Fed can stay sufficiently responsive to USD funding crunches from here with all manner of technical fixes and TOMO operations and the USD will finally turn lower or whether the turnaround in the USD will prove a stop and start affair. Stay tuned for our Q4 outlook on that account.
Is it time for USDJPY to turn around back lower? The Fed message didn’t sound particularly generous to markets, rather a cautious message that the Fed would deal with liquidity issues as they arise but isn’t set to consider notable easing unless there are material concerns on the economic outlook. The chart shows a bit of divergent momentum here after the pair recently bulled up into the 108.00+ resistance area.
The G-10 rundown
USD – is the Fed’s opening up of the balance sheet discussion enough to turn the USD lower? We have an open mind, perhaps most interesting at present in USDJPY, EURUSD and USDCAD
EUR – EURUSD flailing around between 1.10 and 1.1100, our two lines in the sand for what comes next – perhaps more based on the US dollar until we get more determined policy signalling from the EU
JPY – yen begins pulling back to the upside on no new news from the BoJ overnight (but an announcement that it will review its assessment of prices and the economy at the next meeting) and could continue to pull higher here if Powell’s message continues to be seen as weak support for extreme complacency in global markets.
GBP – somehow the market maintains a positive spin on sterling with No Deal still a clear and present danger, especially given that Johnson’s popularity is rising fast (i.e., he could feel emboldened to defy Parliament’s machinations). Hardly expecting BoE to change the plot today.
CHF - ECB at the end of its policy rope and hopes for fiscal, as well as complacency on Brexit perhaps keeping EURCHF near 1.1000. SNB up today, and has to be relieved that they have been able to ease off the intervention recently.
AUD – a weak jobs report overnight (headline looked positive, but full time payrolls dropped and unemployment rate ticked up) knocks AUD lower across the board.
CAD – the USDCAD rate shying away from the pivotal 1.3300 area – one of the areas that stands or falls on the USD outlook.
NZD – slight upside surprise on the Q2 GDP surprises at the margin and sets AUDNZD into consolidation mode – that pair needs to maintain above around 1.0700 to hold the tight trend, but a deeper retracement a risk after a very persistent slop rally off the sub-1.0300 lows.
SEK and NOK – today a test of whether NOK is reactive to rate signals and moves from the Norges Bank as market divided on prospects for a hike today. Key for EURNOK bears is a breakdown through 9.80-75. SEK struggling badly after the Unemployment print earlier on Tuesday.
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