Global FX Strategy View for the day

Global FX Strategy View for the day

The FOMC statement contained no changes to the Fed's forward looking policy guidance and reiterated that rates should remain low for an extended period. There were some minor upgrades to the Fed's description of the economy - the Fed now describes the economy as “continuing to strengthen.” In addition, Hoenig dissented against today's statement, which was a slight surprise, and was likely enough to spark the USD rally in the moments following the statement. Despite this, he is one of the most hawkish voting members of the FOMC and this move does little to alter the Fed outlook. Our US economists would not place any real store by Hoenig's decision - the timing of the dissent may be a surprise but bear in mind that this is a man who as late as last May was arguing for higher interest rates. Currently, the USD is trading higher across the board following the release. Equities are also higher, and are now up by roughly 0.5% on the day. Also, the RBNZ left the official cash rate unchanged at 2.5% as expected. Today’s statement from Bollard accompanying the decision featured few changes. Most importantly, the statement reaffirmed that RBNZ expects “to begin removing policy stimulus around the middle of 2010." Other parts of the statement were very similar, but remained cautious on growth. For example, Bullard reiterated that inflation will stay comfortably within the target range, that credit growth remains subdued, and that households remain cautious. Interestingly, there was no mention of the NZD within the statement, which is a clear change from last month. NZD is little changed immediately following the release. We expect NZD to trade lower near-term on broader risk climate. This evening features the State of Union speech from President Obama. The rebound in equities may be at risk if the President targets financial institutions for further regulation overhaul.

Overnight news

USD: FOMC rate announcement left rates unchanged; Few changes to the accompanying statement, and policy guidance reiterated that rates should remain low for an extended period.

USD: Action 5-year note ($42bn) 5yr notes auction yielded 2.37% which was about 0.75bp rich to pre-auction levels; bid/cover was 2.8, and 60.4% went to end users.

USD: Dec new home sales fell to 342k (000s, saar) (JPM: 350, Cons: 366); Caterpillar reported 4Q EPS of $0.36 Ex-Items $0.41 vs. estimates of $0.28; Boeing reported 4Q EPS of $1.75 vs. estimates of $1.37; Abbott reported 4Q EPS Ex-items of $1.18 vs estimates of $1.17

EUR: ECB’s Weber says it may take further steps in H1 to withdraw liquidity from the system. Says that the overnight rate should climb gradually towards the repo rate. Says there are upside risks to the ECB’s forecasts.

EUR: FT reported that Greece is wooing China to buy as much as 25bn euros of government bonds citing unidentified source. The Greek finance ministry denied the report. 10Y Greek bond yields rise 19bp.

EUR: Les Echos reported that Eurogroup Chairman Juncker that divergences in the euro zone, which increased during the financial crisis could threaten cohesion of the area while also noting that CNY and USD are undervalued and EUR is overvalued.

GBP : Predictably hawkish remarks from BoE's Sentence. He says that we cannot rely on goods deflation to hold back overall inflation, especially as impact of GBP depreciation feeds through. Overall, he says it could be difficult for MPC to keep inflation on target. On GBP, he says it is particularly competitive now vs. EUR.

SEK : Sweden’s finance ministry revises its 2010 GDP forecast from 2% to 3%. CPI now seen at 1.3% vs. 0.4% previously (2010 forecast).

Today’s watchlist (all times GMT; +11hrs for Sydney, +9hrs for Tokyo, -5hrs for New York)

USD: President Obama delivers the State of Union speech @02:00

NZD: RBNZ rate announcement @20:00 (JPM: 2.50, Cons: 2.50)

JPY: Dec total retail sales (%ya) @23:50 (JPM: 0.7, Cons: 0.3)

Overnight price action

FX : The USD is higher following the FOMC statement.

FX vol: Front-end vols are falling following the FOMC statement.

Commodities: Both Oil and gold are down in excess of 1%.

Bonds : yields are higher by 5bp in the short end, and about flat farther out the curve.

Equities : Equities are bouncing following the FOMC statement and are now higher by about 0.5%.

Technical View for the day

The USD pushed higher yesterday while pressuring the well-defined pivot levels following the FOMC with commodity currencies the main underperformers. The price action maintains a two-sided bias but still has failed to confirm a shift despite the effective test and hold of the important resistance levels. In turn, the short term bullish bias for the USD remains intact. The focus remains on the 1.40 support area, as well as the 1.0550 area in USD/CHF and the 78.80 area for the Dollar Index. Sustained breaks would increase the odds that a deeper corrective phase is underway. GBP continued to outperform yesterday while Cable maintained the short term range bias above the 1.6075/1.6100 support area. Still, the action on the crosses argues for additional GBP strength as the setup for EUR/GBP suggests additional weakness is likely following the breakdown below the key .8830/50 zone. We do see an important test for other crosses given the rally in GBP/CHF into the critical 1.70/1.71 area, which should define whether a deeper extension of the January advance is underway. Note that USD/JPY traded a small upside reversal day and this follows the test and so far hold of the key 89.30/00 support area. While the short term setup is oversold, there is still no sign of a reversal yet as the 90.55/91.90 levels maintain the short term bearish setup. Also, note the crosses maintain a heavy tone as well but are attempting to hold important supports highlighted by the 2009 uptrendlines in AUD/JPY and NZD/JPY and the Q4 range lows for NOK/JPY. The ability to hold here will help define whether these crosses are attempting to base.

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