Another strangely quiet day in the FX markets so far. With not much to discuss, markets have been actively chattering about the WSJ article which claimed that the Fed will be pulling back on the “shock and awe” asset purchasing and instead will turn toward smaller, more targeted purchases. The overarching effect on the market will be a radical adjustment to quantitative easing (QE2) expectations and should give the USD a temporary boost to the upside.
Of course, any movement for the greenback depends heavily on economic data and a further erosion in fundamentals will rapidity have the Fed singing a much different tune. USD bulls were able to halt selling during the Asian session and USD-selling in European session is tentative at best.
The other central bank under the QE microscope due to a media report is the Bank of Japan (BoJ). Nikkei news reported that the BoJ is considering further policy actions ahead of next month’s meeting – something that if it happens, will be Yen negative.
Theories and rumors that the BoJ will increase government bond purchases were quickly refuted by Minister Noda, however we believe this will ultimately comes to pass as it’s the most logical avenue for the Japanese to choose. On Japanese economic data, exports rose by a less-than-expected +15.8% y/y vs. +19.0% expected – the data did provide a nice motive for earlier physical intervention as the strong Yen was blamed for the negative spillover into the real economy.
In the UK, Q2 GDP figures are due to be released, a figure which many will be watching as the preliminary release came in significantly higher than expected. Any revision down on this figure will only fuel speculation that further BoE quantitative easing may be around the corner.
Remember that the September BoE meeting noted that a few members foresaw that "the probability that further action would become necessary to stimulate the economy had increased" and members "stood ready to respond in either direction as the balance of risks evolved." Yesterday, the IMF endorsed the UK’s fiscal tightening plans which helped reduce the likelihood of a sharp fall in confidence. For those of you trading the Pound, keep in mind that the market will likely remain jumpy ahead of the Oct. 20th government fiscal austerity measures announcement.
While the UK government rapidly attempts to avert a fiscal crisis, the environment should be positive for the sterling in the long term – however, the upcoming announcement and the looming possibility of further BoE easing will weigh on the GBP in the near term. For pound fans, we would avoid GBPUSD and instead look to trade it against a fiscally sound “Scandi” or “Swissy” in the near future.
With a light economic calendar today, the market will likely focus on EU sovereign risk. In the peripheral countries, yield spreads and credit-default swap (CDS) prices continue to climb higher led by Ireland and Portugal - Irish 2 yr yields rose to their highest level since 2003. Yesterday’s downgrade of Anglo Irish's unguaranteed, senior-debt underscores market anxiety about that the Irish banking sector while rumors continue to swirl that Moody’s is preparing to downgrade Spain. We are not Euro positive today.
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