Fed day is finally here with onlookers expecting the central bank to announce nothing less than a purchase amount of $500 billion. It’s important to keep in mind what the impact of the first phase has been. The purchase of $1.7 trillion in mortgage and government securities has stopped the housing market from falling and allowed mortgage holders the chance to restructure their own balance sheets at preferential rates. It also delivered a current annualized growth rate of 2% and by couching confidence that things would stop sliding helped prevent unemployment from a further acceleration. Today the Fed is challenged by a growth rate that won’t grow jobs enough and remains concerned by deflation. Today the U.S. economy is far-better positioned than at the onset of phase one of quantitative easing and that means that whatever the Fed does today, it will be aware that the outcome will be magnified in that a smaller and perhaps more targeted dose of medicine will go further in achieving its goals.
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U.S. Dollar – Currency investors remain optimistic that the FOMC won’t disappoint and are stepping up riskier alternatives through dollar sales. Emerging market currencies and stocks are higher overnight leaving the dollar index marginally weaker at 76.07. While all eyes are on the Fed later in the afternoon there will are earlier economic releases that could drive the dollar’s fortunes. The impact of pressing down mortgage rates once again disappointed as MBA mortgage applications slid again in the recent week falling by 5%. Last week the measure rebounded. Challenger job cuts for October were lower by 31.8% over a year ago indicating a steady improvement in the labor market. An ADP employment report of private employers’ payrolls indicated the addition of 43,000 new positions in October and more than twice the forecast. Later in the morning we’ll learn the latest ISM services index reading, which is expected to stage a minor revival from a reading of 53.2 in September.
Aussie dollar – Despite a surprise increase in the Aussie short term benchmark rate, the unit is having a hard time clearing the parity hurdle. Investors keep sending the Aussie dollar back below as if just to prove it can manage the leap. But there was additional disappointment in the form of a September reading of building approvals, which fell at a 6.6% monthly pace translating into a year-over-year drop of 11.6%. In reality the data is not a big deal and is an excuse to keep pushing the dollar back. More good news came in the form of the AiG services performance index, which reclaimed expansion once again by leaping from 45.6 to 50.7 as activity amongst service providers grew. The Aussie unit currently buys 99.90 U.S. cents.
British pound – Another surprising piece of data from the U.K. helped spur the pound to a nine-month high against the dollar and lifted it against the euro. The PMI services index for October was forecast to show a further lull in activity across the key sector but in the event increased to a reading of 53.2. The pound leapt to its best since February piercing $1.6150 and currently buys $1.6123 according to Interactive Brokers data. A BRC report showed that price pressures are heating up in Britain although some stores are shielding customers as they temporarily absorb price increases. October store prices rose at a 2.2% annual pace while food prices rose 4.4% on the year and at the fastest pace since June 2009. The pound rallied against the euro, which today buys 86.99 pence. The Bank of England meets on Thursday and many onlookers have pared back expectations that the MPC will ease policy further. Since the pace of growth quickened in a report last week many fear the Bank will hold off until its January meeting if it is indeed set to reenter the bond market.
Japanese yen – Throughout the night the yen remained close to a 15-year high against the dollar. Japanese markets were closed for a holiday keeping political and central bank comments sidelined. In early New York trading the dollar has broken sharply higher against the Japanese unit and recently touched ¥80.93 and close to Tuesday’s peak.
Euro – The euro remains the dark horse and a viable alternative to the greenback ahead of the FOMC. There seems little need and far less chance that the ECB will reenter the major markets to buy government debt. The purchase of peripheral nation’s debt is keeping the region’s central banks fully occupied as investors fret over budget wrangling. The euro earlier reached $1.4059 matching Tuesday’s peak but has failed to build on its gain. Data-wise, the Eurozone is quiet today.
Canadian dollar – The Canadian dollar continues a grinding journey towards parity in a move that started six sessions ago from 96.60 U.S. cents. The loonie has had less fundamental reason to jolt out of bed, unlike the Aussie dollar, and is making slow progress and earlier today reached 99.28 cents to hit its highest level since mid-October. Currently the Canadian dollar buys 99.18 cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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