The FOMC will in all likelihood end bond purchase tapering today and is likely that it keeps its position to hold rates low for a “considerable time”. Now that QE3 is likely to come to an end, the FED has a very important decision to make. Either they will try changing the “considerable time” pledge to something else, or they could change it to mean it is “unconditional” or they could change the wording completely. We have seen over the past week or so the majority of analysts thinking that the “considerable time” wording will be left unchanged. In my opinion, rather than rock the boat the FED is likely to leave things as they are and then at the December (16/17th) meeting decide whether it is time to change the wording to something else, and by doing so open the door to a rate hike. While the FED made no comment whatsoever to the (stock) market volatility we saw a few weeks ago, I wonder whether they are concerned about another bout of selling pressure. As I wrote in our Blog yesterday, some of the biggest companies in the world continue to announce profit warnings, something which cannot go unheeded and ignored for much longer. Having said that, stock markets globally continue to recover oblivious to world fundamentals and events. It is as though the markets are acting in a vacuum. This has left me properly confused and dumbfounded.
Something tells me there is likely to be a word or phrase which will lead to a sell off in the USD (EURUSD potentially up to 1.2975). The CB’s are playing funny games, first the ECB announces the EUR (USD) was too strong and needed to fall (which is duly did), and then recently the FED said the strong USD has “hurt” the US economy which in turn sent the EUR (USD) back up. They can’t have it both ways. One will ultimately prevail, and as I have said many many times, given the recessionary/deflationary fears in the EU -vs- the growth in the US, surely it is inevitable that the USD will rally against the EUR sending it ultimately to my target of 1.2000 (Dec 31st). I have another 2 months to get this prediction right, my thinking now is perhaps I was a little hasty and over-zealous. Still even if we get to the 1.22/1.23 handle, I will be happy with my prediction.
Tonight also sees the NZ CB (RBNZ) announce their rate decision, with the market anticipating no change to the current 3.50% level. Again one should note, that any USD sell off would see NZDUSD and AUDUSD make healthy gains as the market digests Yellen’s comments.
USDILS has not had it all its own way. With the CB keeping rates unchanged at 0.25% earlier this week, the ILS has nevertheless failed to “recover” like other EM currencies. Trading remains cautious given the continued “balagan” (mess) we are seeing with ISIS, Egypt, Syria, and the M.E in general. The Israeli economy and the CB in particular has shown some signs of weakness, with the BoI stating that it wants to observe the full effects of the recent cuts (0.50%) before taking further action. As interest rates have fallen further the ILS will remain on the back foot, aided by a drop in inflation (in line with other major economies) and weakness in Israel’s growth indicators.
Good luck and have a good day ahead