Fed could be easing; and USD strengthens?
Late Wednesday 20th June the Fed’s FOMC was due for an interest rate decision, as expected they remained unchanged, but the real focus was not on any rate changes but on policy changes and if further easing was in the horizon.
In 2011, in an effort to lower long-term interest rates, the Fed announced its “Operation Twist”. A process by which the Fed sells short term treasuries to buy long term bonds and in so doing pressures long term yields lower. Now this tool was set to expire this month but the Fed decided to extend it till end of year.
Interesting to see how the USD reacted to this. Wednesday of last week as news hit the wires initially the EUR/USD spiked to a day’s high at 1.2743; the promise of possible additional easing is usually short term negative for the currency – but the move here was very short lived.
In effect the process involved in selling short term treasuries to buy the long term ones has a rather neutral effect on the currency, as opposed to another round of QE that would have boosted the supply of US Dollars and would thus be USD negative. Now even though the Fed did highlight that it was prepared to take further action as appropriate - the next FOMC meeting is not scheduled until early August and Forex investors will likely take the opportunity of a safe shelter in the meantime.
Risk was mostly off in the former part of this week especially with the EZ unable to quell the concerns surrounding it. This explains the current demand for the USD despite the Fed’s promise to ease if needed.
In the former part of this week the USD was overall in positive territory, when seen against the major currencies, with the bulk of the gains coming from against the euro, where it recovered 0.77%, and from against the CHF were it gained 0.75%.
The USD took the lead and the EUR/USD hit two-week lows as the currency pair started to challenge the 1.2450 area and the USD continued to garner support. For the current week we expect price moves towards the downside to be capped around 1.2382 while to the upside resistance should restrain further rises in the 1.2700 – 1.2838 area.
Euro Zone issues still leave investors uneasy ahead of EU summit
Back to the dreaded issues of the euro zone, last Monday Spain formally requested a bailout for its banks after that Stress tests conducted last Friday revealed that the Spanish banking system would require at least EUR 60 billion in capital needs. So far the bailout remains without a price tag however, as no amount has been formally confirmed for the rescue. Moody’s downgrade of 28 Spanish banks, motivated by an increasing credit-risk, did not help alleviate concerns either.
Even Cyprus announced last Monday that it was formally applying for EU rescue funds, making it the fifth country needing rescue funds. Media reports had suggested that the EU’s third smallest economy had been trying to secure aid from China and Russia before finally resorting to the EU.
Ahead of the EU leaders Summit due on the 28th and 29th June investors ran out of optimism after the leaders of the EZ’s four largest economies met in Rome last Friday, but failed to come up with any tangible outcome for the anxious investors. The German, French, Italian and Spanish leaders pointed towards the creation of a growth package worth EUR 130 billion but details regarding this were lacking.
Japanese lower house approves hike in tax as they start to tackle a fiscal deficit
Earlier last Tuesday a Japanese sales tax hike bill made it through the lower house, a move that was described by Moody’s to be a credit positive move as the country tries to start addressing its fiscal deficit. The bill will be doubling the sales tax to 10% over three years; and Finance Minister Azumi highlighted that government must ensure that it does not reflect negatively on economic growth.
The bill however could be putting the ruling party in some difficulty if the party lawmakers, that did not back the bill, decide to leave the party. Nonetheless it remains a first step towards tackling the country’s public debt bill.
The USD/JPY slipped to week’s lows (at least up to the time of writing) at 79.23, to the downside support should be met at 78.15 while resistance should be met at 81.06 – 81.70.
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This article has been prepared by Rudolf Muscat, Senior Trader at RTFX Ltd.
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