FX: Central Banks in Focus
Arne Lohmann Rasmussen, Chief Analyst, Danske Bank
Main event this week was the announcement that the Fed will purchase USD40bn in mortgage-backed securities and USD45bn in longer-term Treasury securities. If the programme is continued for 12 months, this would imply a total balance sheet expansion of USD1,020bn. In other words, very aggressive monetary easing, which should surely be dollar negative.Continued monetary easing from the Fed is in our view supportive for carry strategies of which we recommend four of in our FX Top Trades 2013.
FOMC Easing Creates Pricing Issues
John E. Silvia, Chief Economist, Wells Fargo
As expected, the Federal Open Market Committee (FOMC) decided to continue with the current easing program. With its supply of short-term securities running low, the Fed will now simply buy long-term Treasury securities of about $45 billion per month. This should increase the Fed’s balance sheet and thereby supply greater liquidity to capital markets. Yet, for financial market and private decision makers, the continued pursuit of lower unemployment in the labor market through monetary policy is creating a greater pricing problem over time in other markets and longer-run inflation risks as evidenced by the sell-off in Treasuries and the dollar.
U.S. – On Guideposts And Magic Wands
Martin Schwerdtfeger, Senior Economist, TD Bank Financial Group
Nobody would dare and doubt the resolve of Fed Chairman Bernanke when he claimed that if “we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously we would do that”; but, in the absence of magic, Mr. Bernanke and his colleagues at the FOMC decided this week to stick with other tricks from their repertoire. First, they decided to continue buying agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities, initially to the tune of $45 billion per month. Finally, the Committee also modified its guidance about future changes to the interest rate. Namely, they anticipate that the federal funds rate is likely to stay exceptionally low at least as long as the unemployment rate remains above 6.5%, provided that inflation over the next two years is projected not to exceed 2.5%, and that longer-term inflation expectations remain stable. However, Chairman Bernanke emphasized that these thresholds are not automatic triggers for rate increases, but rather guideposts in terms of when the reduction of accommodation could begin.
Compiled by David Song, Currency Analyst