Financial markets banking on FOMC to come to the party

15.32 AEST, Wednesday 20 June 2012

Financial markets banking on FOMC to come to the party

By Tim Waterer (Senior Trader, CMC Markets)

The mood of financial markets has swung into more favourable territory, however the large dependence on the FOMC to ‘come to the party’ with more monetary easing adds a sizeable layer of fragility to the recent rebound.

As such, we could be looking at a pretty decisive move one way or the other when the FOMC makes their statement An extension of Operation Twist or a brand new asset purchase program would see an unwinding of US Dollar long positions, however a defiant stand by the Fed to stick with the status quo would see the Greenback soar.

When the FOMC announce their game plan going forward for the economy, it is the US Dollar reaction to this that will set the tone for the broader market, with the likes of gold, oil and the Euro all set to take their cues from the directional move in the Dollar.

The better sentiment prevailing in the market has the Australian Dollar poised to run higher over coming weeks should the FOMC announce easing measures. Such a move would appease the market and have traders once again on the search for yield, with the AUD offering plenty of attraction in that regard. Also, in light of the RBA minutes suggesting that they are in no hurry to cut rates again we could conceivably see the AUDUSD rate back at 1.03 next week if equity markets continue to march higher. However if Spanish yields flare up again it could be a different story in which case staying above parity would be an achievement in the short term.

Share markets across Asia today were mostly on the advance due to the prevailing train of thought being that the FOMC will deliver the goods with stimulus measures. While traders want to be ‘on board’ should the market take off in coming days on any FOMC action, the downside risk should not be ignored in case the committee does not give the market the quantitative easing which it so openly desires. The phrase ‘spit the dummy’ could be given new meaning if the FOMC statement is devoid of easing measures.

The Australian market curtailed its enthusiasm in afternoon trade, with traders being mindful of not setting themselves up too much for a fall if the FOMC disappoint the market. Financials and energy stocks performed quite well courtesy of the strong leads we received from offshore, however overall it was quite a mundane performance on the index. The reserved trading fashion on our market today was reflective of how important the FOMC statement shapes regarding direction for the market over the short term. I would expect tomorrow’s trading activity to have greater conviction once we know where the US sits in regards to QE3 or an equivalent measure.

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