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US Dollar Expected to Broadly Rise as Federal Reserve Withholds QE3

US Dollar Expected to Broadly Rise as Federal Reserve Withholds QE3

2012-06-20 06:50:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • All Eyes on FOMC Rate Decision as Global Growth Trends Return to Spotlight
  • US Dollar to Rise as Fed Renews “Operation Twist” But Withholds QE3 Program
  • Pound to Fall if BOE Minutes Show Swelling Support for Asset Purchase Boost

All eyes are on the Federal Reserve monetary policy announcement as global economic growth concerns retake the spotlight from fears of a sudden rupture in the Eurozone following the weekend’s pro-bailout outcome to the Greek general election. With Europe expected to sink into recession while Asia sees its slowest growth since 2009 (according to a survey of economists polled by Bloomberg), traders are reasonably looking to North America, and specifically the US, to offer a counterbalance.

With that in mind, an outright expansion of asset purchases would prove most supportive for risk appetite and most damaging for the US Dollar. At the other extreme, doing nothing would amount to de-facto tightening since the so-called “Operation Twist” – a scheme to flatten the yield curve in place since late September – is due to expire this month, weighing heavily on risky assets and pushing the greenback aggressively higher. We suspect policymakers will opt for a middle path, renewing Twist to maintain the current status quo but withholding an outright expansion of QE.

Indeed, with nominal US Treasury yields already near record lows and real borrowing costs in negative territory out to the 10-year maturity, the likelihood that the Fed can generate a substantial increase in lending at the margin seems implausible. Ben Bernanke has explicitly said that it would be “very reckless” to seek a modest pickup in economic activity at the expense of higher inflation, meaning a QE3 program that amounts to little more than a confidence-building exercise is unlikely. Still, US economic data has increasingly underperformed relative to expectations over the past two months, meaning an extension of Twist and perhaps another extension of the time period within which rates are pledged to be kept low seems appropriate.

With markets pining for accommodation, this is likely to disappoint investors and drive risk aversion, boosting USD against its top counterparts (albeit less so than if the Fed did nothing). The sentiment-sensitive Australian, New Zealand and Canadian Dollars will probably see outsized losses. Near-term correlation studies suggest USDJPY is more sensitive to US Treasury yields than risk appetite at the moment, meaning the Japanese Yen is likely to decline against the Dollar even as it rides haven flows higher versus the other majors.

Minutes from June’s Bank of England meeting headline the economic calendar. The announcement is likely to reflect a dovish shift in policymakers’ thinking, but that revelation in and of itself is unlikely to surprise investors after Governor Mervyn King’s unveiled a new credit-loan program last week. Gauging the possibility that the new effort will be coupled with additional QE – an outcome explicitly left open by the BOE chief – will be far more important. With that in mind, a swell in votes in favor of expanding asset purchases is likely to weigh the British Pound. Separately, Jobless Claims are expected to inch slightly lower in May, down 4,000 from the prior month.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

22:45

NZD

Current Account Balance (1Q)

-1.310B

-1.145B

-2.833B (R+)

22:45

NZD

Current Account Deficit-GDP Ratio (1Q)

-4.8%

-4.6%

-4.2% (R+)

23:50

JPY

Bank of Japan May 22-23 Meeting Minutes

-

-

-

23:50

JPY

Merch. Trade Balance Total (¥) (MAY)

-907.3B

-544.4B

-522.0B (R-)

23:50

JPY

Adj. Merch. Trade Balance (¥) (MAY)

-657.2B

-347.7B

-512.0B

23:50

JPY

Merch. Trade Exports (YoY) (MAY)

10

9.7

7.9

23:50

JPY

Merch. Trade Imports (YoY) (MAY)

9.3

3.3

8.1

0:00

AUD

Conference Board Leading Index (APR)

-1.4%

-

0.2%

0:30

AUD

Westpac Leading Index (MoM) (APR)

0.5%

-

0.5%

1:00

AUD

DEWR Internet Skilled Vacancies (MoM) (MAY)

-0.7%

-

-0.6% (R+)

1:30

AUD

Dwelling Starts (1Q)

-12.6%

-2.3%

-4.5% (R+)

4:30

JPY

All Industry Activity Index (MoM) (APR)

0.1%

0.1%

-0.3%

7:00

JPY

Convenience Store Sales (YoY) (MAY)

-

6.1%

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:00

EUR

German Producer Prices (MoM) (MAY)

-0.2%

0.2%

Low

6:00

EUR

German Producer Prices (YoY) (MAY)

2.2%

2.4%

Low

8:00

EUR

Italy Industrial Orders n.s.a. (YoY) (APR)

-8.6%

-14.3%

Low

8:00

EUR

Italy Industrial Orders s.a. (MoM) (APR)

-2.0%

3.5%

Low

8:00

EUR

Italy Industrial Sales s.a. (MoM) (APR)

-

0.0%

Low

8:00

EUR

Italy Industrial Sales n.s.a. (YoY) (APR)

-

-3.1%

Low

8:30

GBP

Bank of England Minutes

-

-

High

8:30

GBP

Claimant Count Rate (MAY)

4.9%

4.9%

Medium

8:30

GBP

Jobless Claims Change (MAY)

-3.0K

-13.7K

High

8:30

GBP

Average Weekly Earnings (3M/YoY) (APR)

0.8%

0.6%

Low

8:30

GBP

Weekly Earnings exBonus (3M/YoY) (APR)

1.8%

1.6%

Low

8:30

GBP

ILO Unemployment Rate (3M) (APR)

8.2%

8.2%

Medium

8:30

GBP

Employment Change (3M/3M) (APR)

135K

105K

Low

9:00

CHF

ZEW Survey (Expectations) (JUN)

-

-4

Medium

9:00

EUR

Current Account (€) (APR)

-

-2384M

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2592

1.2754

GBPUSD

1.5641

1.5783

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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